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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-17189
KOLL REAL ESTATE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0426634
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4343 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 833-3030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.05 PER SHARE
(TITLE OF CLASS)
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK,
PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
12% SENIOR SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002
(TITLE OF CLASS)
12% SUBORDINATED PAY-IN-KIND DEBENTURES DUE MARCH 15, 2002
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF JANUARY 31, 1997 WAS $6,069,279.
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF JANUARY 31,
1997 WAS 48,938,543.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
The Company is a real estate development company with properties principally
in Southern California. The principal activities of the Company and its
consolidated subsidiaries include: (i) obtaining zoning and other entitlements
for land it owns and improving the land for residential development; (ii) single
and multi-family residential construction in Southern California; and (iii)
providing commercial, industrial, retail and residential real estate development
services to third parties, including feasibility studies, entitlement
coordination, project planning, construction management, financing, marketing,
acquisition, disposition and asset management services on a national and
international basis, through its offices throughout California, and in Dallas,
Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the residential land
owned by the Company is entitled, the Company may sell unimproved land to other
developers or investors; sell improved land to homebuilders; or participate in
joint ventures with other developers, investors or homebuilders to finance and
construct infrastructure and homes. The Company intends to consider additional
real estate acquisition and joint venture opportunities; however, the Company's
immediate strategic goals are to (i) obtain new financing for development of the
Bolsa Chica mesa; (ii) successfully defend against the litigation challenging
the California Coastal Commission's approval of the Bolsa Chica project; (iii)
complete the secondary permitting for development of the Bolsa Chica mesa; (iv)
commence infrastructure construction on the Bolsa Chica mesa in the fourth
quarter of 1997; (v) continue the growth of the Company's commercial development
business on a national and international basis; and (vi) complete the proposed
recapitalization of the Company to deleverage the Company's capital structure,
which proposed recapitalization includes a combination and reclassification of
the Company's Class A Common Stock and Series A Convertible Preferred Stock
through the issuance of 1.75 shares of Common Stock for each outstanding share
of Preferred Stock, a one for one hundred (1:100) reverse stock split of the
reclassified Common Stock and the exchange, pursuant to a registered exchange
offer, of reclassified Common Stock for all of the Company's outstanding senior
subordinated debentures and subordinated debentures (collectively the
"Recapitalization"). There can be no assurance that the Company will accomplish,
in whole or in part, all or any of these strategic goals.
The Company's executive offices are located at 4343 Von Karman Avenue,
Newport Beach, California 92660 (telephone: (714) 833-3030).
PRINCIPAL PROPERTIES
The following sections describe the Company's principal properties.
BOLSA CHICA. The Bolsa Chica property is the principal property in the
Company's portfolio. Following completion of the Company's recent sale of
approximately 880 lowland acres of its Bolsa Chica property to the State of
California on February 14, 1997, as described below, the Company owns
approximately 310 acres of the 1,600 acres of undeveloped Bolsa Chica land,
approximately 1,200 acres of which will be devoted to the restoration, creation
and preservation of wetlands, open space, parks and trails. Bolsa Chica is
located adjacent to the Pacific Ocean in northwestern Orange County, California.
Bolsa Chica is bordered on the north and east by residential development, to the
south by open space and residential development, and to the west by the Pacific
Coast Highway and the Bolsa Chica State Beach. Bolsa Chica is one of the last
large undeveloped coastal properties in Southern California, and is located
approximately 35 miles south of downtown Los Angeles.
The planned community at Bolsa Chica is expected to offer a broad mix of
home choices, including single-family homes, townhomes and condominiums at a
wide range of prices. In December 1994, the Orange County Board of Supervisors
unanimously approved a Local Coastal Program ("LCP") for up to 3,300 units of
residential development and a wetlands restoration plan for this property. The
3,300-unit LCP provides for development of up to 2,500 homes on the mesa (high
ground) portion of the property and up to 900 homes on the lowland portion of
the property, not to exceed 3,300 homes in the aggregate.
1
The related Development Agreement was unanimously approved by the Orange County
Board of Supervisors in April 1995. The California Coastal Commission approved
the LCP in January 1996 subject to suggested modifications. These suggested
modifications were approved by the Orange County Board of Supervisors in June
1996, and on July 11, 1996 the California Coastal Commission certified the LCP
for the Company's Bolsa Chica property.
On February 14, 1997, the Company completed the sale of approximately 880
lowland acres owned by the Company at Bolsa Chica to the California State Lands
Commission for $25 million, and will, therefore, forego opportunities to develop
up to 900 homes in the lowland. Under an interagency agreement among various
state and federal agencies, these agencies have agreed to restore the Bolsa
Chica lowlands utilizing escrowed funds from the Ports of Los Angeles and Long
Beach. A reserve of $1.5 million has been included in the Company's Balance
Sheet as of December 31, 1996, with respect to potential costs payable by the
Company under agreements negotiated with the State Lands Commission and certain
oil field operators regarding environmental clean-up at the Bolsa Chica
lowlands. See Note 5 to Financial Statements. In connection with the lowlands
sale, the Company paid $833,333 of these costs at closing, leaving a reserve
balance of $700,000 on its financial statements for potential additional
clean-up costs.
The Company is now pursuing the secondary permitting process for the mesa
through the County of Orange in order to implement the approved development plan
for up to 2,500 homes. This process is currently expected to be completed in the
fourth quarter of 1997. The Company expects, subject to its ability to obtain
financing on a commercially reasonable and timely basis, and subject to
obtaining the secondary permits, to commence infrastructure construction on the
mesa in the fourth quarter of 1997. However, due to certain factors beyond the
Company's control, including possible objections of various environmental and
so-called public interest groups that may be made in legislative, administrative
or judicial forums, the start of construction could be delayed. In this regard,
on March 6, 1996 and March 11, 1996, two lawsuits were filed against the Coastal
Commission, the Company and other Bolsa Chica landowners as real parties in
interest, alleging that the Coastal Commission's approval of the LCP is not in
compliance with the Coastal Act and other statutory requirements. These lawsuits
seek to set aside the approval of the Bolsa Chica project and are currently
scheduled to be tried in April 1997. Given the recent sale of the Bolsa Chica
lowlands described above, the primary issues which were the subject of this
litigation have been eliminated. Furthermore, the plaintiffs in one of these
lawsuits have informed the Company that given the sale of the lowlands, they
will work with the Company in an effort to resolve the remaining issues of their
lawsuit. The Company believes that the remaining litigation issues which
challenge development of the Bolsa Chica mesa are without merit. Furthermore,
the Company does not believe that these lawsuits will be successful in
permanently preventing the Company from completing the Bolsa Chica project,
however, there can be no assurance in this regard or that these suits will not
result in delays.
Realization of the Company's investment in Bolsa Chica will depend upon
various economic factors, including the demand for residential housing in the
Southern California market and the availability of credit to the Company and to
the housing industry. See Notes 2 and 5 of Notes to Financial Statements.
RANCHO SAN PASQUAL (FORMERLY EAGLE CREST). In the City of Escondido in San
Diego County, approximately 30 miles north of downtown San Diego, the Company is
developing an 850-acre, gated community consisting of 580 residential lots
surrounding an 18-hole championship golf course which the Company operated from
May 1993 to June 1996. The Company sold its Eagle Crest Golf Course at Rancho
San Pasqual in June 1996, to a nationally recognized owner/operator of high-end
daily fee golf courses and private country clubs for $6.1 million. On-going
infrastructure construction was partially financed in 1995 and 1996 with a major
financial institution which provided a total of $10 million in construction
loans for the project. During the year ended December 31, 1996, the Company
completed sales of 218 residential lots at Rancho San Pasqual to four
homebuilders for gross proceeds aggregating approximately $10.1 million. These
four homebuilders have rolling options which if exercised would result in the
sale of an additional 230 lots over the next eighteen (18) months for aggregate
gross proceeds approximating
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$10.4 million. Under loan agreements with Nomura Asset Capital Corporation, the
Company utilized 90% of such sales proceeds and proceeds from formation of the
Fairbanks Highlands joint venture described below, along with 50% of the net
proceeds from Rancho San Pasqual assessment district reimbursements, to prepay
approximately $18.2 million of outstanding senior bank debt during the year
ended December 31, 1996. As of December 31, 1996, the Company had fully utilized
its availability under the construction loan.
FAIRBANKS HIGHLANDS. This property consists of approximately 390 acres near
the communities of Fairbanks Ranch and Rancho Santa Fe in the northern part of
the City of San Diego. In December 1995 the Company received approval of a
vesting tentative map from the City of San Diego's City Council. The approved
plan includes 93 single-family residential lots averaging 1.34 acres each and
approximately 215 acres of open space. In December 1996, the Company formed a
joint venture with a major homebuilder to develop this property. Under the terms
of the joint venture agreement, the Company contributed its land to the venture
at market value of $7.6 million in exchange for an initial cash payment of $4
million, a preferred return on its $3.6 million capital contribution and a
continuing partnership interest in the venture. The Company's partner will
manage the day-to-day operations of the venture, provide all construction
financing and expects to build the majority of the homes at the site.
ALISO VIEJO. Through a subsidiary, the Company owns a 49% general
partnership interest in a 230-acre project, planned for approximately 1,200
single family residential units in southern Orange County. The property is well
located, within close proximity to transportation infrastructure, employment
centers and other attractions, including the Orange County (John Wayne) Airport
(approximately 15 miles), the San Joaquin Hills Transportation Corridor (a
quarter mile) and Laguna Beach (approximately 10 minutes). Homes are now offered
for sale at seven of twelve planned communities, and a total of 254 homes have
been sold and 58 homes were in escrow as of February 9, 1997. However, due to a
significant shortfall in sales during 1995 versus forecast, the financial
structure of the partnership and the significant amount of participating
mortgages with preference to the Company's equity interest, the Company does not
expect to receive a financial return from this partnership and established a
reserve in 1995 as discussed below in Note 3 to Financial Statements.
OTHER PROPERTIES. The Company owns land zoned for commercial/industrial use
in Signal Hill, California, and resort/residential property in Michigan. These
properties are currently held for sale, subject to market conditions. A portion
of the Signal Hill property has been improved with a 45,000 square foot
distribution building, which is currently in escrow and scheduled to be sold
during March 1997. In addition, during 1996, the Company acquired property in
Phoenix, Arizona and Allen, Texas and is constructing a corporate headquarters
facility and office/distribution center, respectively, on a build-to-suit basis.
The Company has contracted for the sale of each of these buildings, which sales
are expected to close in the third quarter of 1997.
PROPERTY DISPOSITIONS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's property dispositions during 1994, 1995 and 1996.
ENVIRONMENTAL AND REGULATORY MATTERS. Before the Company can develop a
property, it must obtain a variety of discretionary approvals from local and
state governments, as well as the federal government in certain circumstances,
with respect to such matters as zoning, subdivision, grading, architecture and
environmental matters. The entitlement approval process is often a lengthy and
complex procedure requiring, among other things, the submission of development
plans and reports and presentations at public hearings. Because of the
provisional nature of these approvals and the concerns of various environmental
and public interest groups, the approval process can be delayed by withdrawals
or modifications of preliminary approvals and by litigation and appeals
challenging development rights. Accordingly, the ability of the Company to
develop properties and realize income from such projects could be delayed or
prevented due to litigation challenging recently obtained governmental
approvals.
3
As more fully described above, in July 1996, the California Coastal
Commission certified Orange County's residential development plan for Bolsa
Chica. The Company now has the necessary primary approvals to proceed with
development of up to 2,500 homes on the Bolsa Chica mesa. Secondary approvals of
the details of the development plan, such as tentative tract maps and grading
approvals from the County of Orange's planning staff, as well as a master
coastal development permit from the County of Orange, must still be obtained.
Nevertheless, the approval process for the Bolsa Chica property remains subject
to the litigation described above, and there can be no assurance that such
litigation will not result in delays.
The Company has expended and will continue to expend significant financial
and managerial resources to comply with environmental regulations and local
permitting requirements. Although the Company believes that its operations are
in general compliance with applicable environmental regulations, certain risks
of unknown costs and liabilities are inherent in developing and owning real
estate. However, the Company does not believe that such costs will have a
material adverse effect on its business, financial condition or results of
operations, including the potential remediation expenditures proposed in
connection with certain indemnity obligations discussed below in "Corporate
Indemnification Matters."
CORPORATE INDEMNIFICATION MATTERS. The Company and its predecessors have,
through a variety of transactions effected since 1986, disposed of several
assets and businesses, many of which are unrelated to the Company's current
operations. By operation of law or contractual indemnity provisions, the Company
may have retained liabilities relating to certain of these assets and
businesses, including certain tax liabilities. See Notes to Financial
Statements. Many of such liabilities are supported by insurance or by
indemnities from certain of the Company's predecessors and currently or
previously affiliated companies. The Company believes its balance sheet reflects
adequate reserves for these matters.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of Allied Signal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However, Allied
Signal has, through UOP, asserted a contractual indemnification claim against
the Company for all claims that may be asserted against UOP by EPA or other
parties with respect to the site. EPA has proposed a clean-up plan which would
involve covering certain real property both contiguous and non-contiguous to
Torch Lake with soil and vegetation in order to address alleged risks posed by
copper tailings and slag at an estimated cost of $6.2 million. EPA estimates
that it has spent approximately $3.9 million to date in performing studies of
the site. Under CERCLA, EPA could assert claims against the Torch Lake PRPs,
including UOP, to recover the cost of these studies, the cost of all remedial
action required at the site, and natural resources damages. In June 1995, EPA
proposed a CERCLA settlement pursuant to which UOP would pay between $2.6 and
$3.3 million in exchange for a limited covenant by EPA not to sue UOP in the
future. The Company, without admission of any obligation to UOP, has determined
to vigorously defend UOP's position that the EPA's proposed cleanup plan is
unnecessary and inconsistent with the requirements of CERCLA given that the
EPA's own Site Assessment and Record of Decision found no immediate threat to
human health. In the Company's view the proposed remediation costs would be in
excess of any resulting benefits.
EMPLOYEES. As of December 31, 1996 the Company and its subsidiaries had
approximately 125 employees.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain of the foregoing information as well as certain information set
forth in "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is forward looking in nature and
involves risks and uncertainties that could significantly impact the ability of
the Company to achieve its
4
currently anticipated goals and objectives. These risks and uncertainties
include, but are not limited to, litigation or appeals of regulatory approvals
(including pending litigation challenging the California Coastal Commission's
approval of the Bolsa Chica project) and availability of adequate capital,
financing and cash flow. In addition, future values may be adversely affected by
increases in property taxes, increases in the costs of labor and materials and
other development risks, changes in general economic conditions, including
higher mortgage interest rates, and other real estate risks such as the demand
for housing generally and the supply of competitive products. Real estate
properties do not constitute liquid assets and, at any given time, it may be
difficult to sell a particular property for an appropriate price.
EXECUTIVE OFFICERS OF THE COMPANY
Certain of the executive officers of the Company are also executive officers
of The Koll Company ("Koll") and its affiliates. Accordingly, they will devote
less than all of their working time to the businesses of the Company. Set forth
below is information with respect to each executive officer.
NAME AND TITLE AGE* BUSINESS EXPERIENCE
- ------------------------------ ---- ------------------------------------------
Donald M. Koll 63 Chairman of the Board of the Company since
Chairman of the Board and March 1993 and Chief Executive Officer
Chief Executive Officer since October 1996. Managing Director --
President and Director of the Company
since prior to July of 1992. Chairman of
the Board and Chief Executive Officer of
Koll (general contracting and
international real estate development
since prior to 1992) and Chairman of the
Board of Koll Management Services, Inc.,
also known as Koll Real Estate Services
("KRES") (real estate management) since
prior to 1992. Also a Director of Fidelity
National Financial, Inc. since March 1995.
Richard M. Ortwein 55 President of the Company since October
President 1993. President, Southern California
Division of Koll since prior to 1992.
Executive Vice President of KRES from
prior to 1992, and Director of KRES from
1992 to March 1994.
Raymond J. Pacini 41 Executive Vice President and Secretary of
Executive Vice President, the Company since 1993; Chief Financial
Chief Financial Officer, Officer and Treasurer of the Company since
Treasurer and Secretary June of 1992. Managing Director of the
Company prior to June of 1992. Executive
Vice President and Chief Financial Officer
of KRES from March to November 1993.
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* As of December 31, 1996
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Newport Beach,
California. The Company and each of its subsidiaries believe that their
properties are generally well maintained, in good condition and adequate for
their present and proposed uses. The inability to renew any short-term real
property lease would not be expected to have a material adverse effect on the
Company's results of operations.
5
The principal properties of the Company and its subsidiaries, which are
owned in fee unless otherwise indicated, are as follows:
PROPERTY LOCATION ACRES PRESENT OR PLANNED USE
- ---------------------------- -------------------------- --------- --------------------------------------
Newport Beach* Newport Beach, CA -- Headquarters
Bolsa Chica Huntington Beach, CA 310 Oceanfront residential community
Rancho San Pasqual Escondido, CA 650 Residential community
Fairbanks Highlands** San Diego, CA 390 Residential community
Aliso Viejo** Aliso Viejo, CA 230 Residential community
Michigan Land Upper Peninsula, MI 1,100 Resort/residential lots
Signal Hill Signal Hill, CA 3 Commercial/industrial land and
distribution facility
PetsMart Phoenix, AZ 20 Corporate headquarters
EDS*** Allen, TX 14 Office/distribution center
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* Leased
** Minority interest in partnership or limited liability company
*** Majority interest in partnership
ITEM 3. LEGAL PROCEEDINGS
On January 13, 1995, two lawsuits challenging the Orange County Board of
Supervisors' approval of the Bolsa Chica project were filed in Orange County
Superior Court (the "Court"). Although the lawsuits differed in the particular
issues they raised, generally they each alleged, among other things, violations
of the California Environmental Quality Act and violations of the California
Government Code planning and zoning laws. One lawsuit, which was brought by the
school districts, has been settled with an agreement regarding school fees to be
paid to the plaintiff districts. In the other "environmental lawsuit," the
plaintiffs did not seek monetary damages, but instead asked the Court to set
aside the approval of the Bolsa Chica project. In February 1996, the Court ruled
on the "environmental lawsuit," rejecting all but one of the arguments, and
requiring an additional 45-day public review and comment period regarding the
tidal inlet portion of the wetlands restoration plan, which was completed in the
second quarter of 1996. The County reapproved the plan without change in June
1996 and the Court approved a judgment dismissing the lawsuit on January 24,
1997.
On March 6, 1996 and March 11, 1996 two lawsuits were filed against the
Coastal Commission, the Company and other Bolsa Chica landowners as real parties
in interest, alleging that the Coastal Commission's approval of the 3,300-unit
LCP is not in compliance with the Coastal Act and other statutory requirements.
These lawsuits seek to set aside the approval of the Bolsa Chica project and are
currently scheduled to be tried in April 1997. Given the recent sale of the
Bolsa Chica lowlands described above, the primary issues which were the subject
of this litigation have been eliminated. Furthermore, the plaintiffs in one of
these lawsuits have informed the Company that given the sale of the lowlands,
they will work with the Company in an effort to resolve the remaining issues of
their lawsuit. The Company believes that the remaining litigation issues which
challenge development of the Bolsa Chica mesa are without merit. Furthermore,
the Company does not believe that these lawsuits will be successful in
permanently preventing the Company from completing the Bolsa Chica project,
however, there can be no assurance in this regard or that these suits will not
result in delays. See "Business--Environmental and Regulatory Matters," and
"--Corporate Indemnification Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following tables set forth information with respect to bid quotations
for the Common Stock of the Company for the periods indicated as reported by
NASDAQ. These quotations are interdealer prices without retail markup, markdown
or commission and may not necessarily represent actual transactions.
HIGH LOW
--------- ---------
1996
First Quarter............................................ $ .531 $ .313
Second Quarter........................................... .250 .156
Third Quarter............................................ .250 .156
Fourth Quarter........................................... .250 .125
1995
First Quarter............................................ $ .500 $ .344
Second Quarter........................................... .469 .313
Third Quarter............................................ .594 .344
Fourth Quarter........................................... .469 .250
1994
First Quarter............................................ $ .531 $ .250
Second Quarter........................................... .406 .125
Third Quarter............................................ .344 .188
Fourth Quarter........................................... .625 .281
The number of holders of record of the Company's Common Stock as of December
31, 1996 was approximately 25,000. The Company has not paid any cash dividends
on its Common Stock to date, nor does the Company currently intend to pay
regular cash dividends on the Common Stock. Such dividend policy is and will
continue to be subject to prohibitions on the declaration or payment of
dividends contained in debt agreements of the Company.
7
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Company and its
consolidated subsidiaries. The following information should be read in
conjunction with the financial statements beginning on page F-2 of this Form
10-K.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments (a).......... $ 41.6 $ 43.5 $ 13.0 $ 4.9 $ 2.1
Total assets (a)............................................... 486.1 436.0 414.0 272.4 272.2
Senior bank debt (b)........................................... 65.4 7.0 -- 16.6 7.1
Project debt................................................... -- -- -- -- 12.5
Subordinated debentures (b).................................... 165.1 134.9 152.9 173.2 195.9
Total stockholders' equity (c)................................. $ 149.6 $ 163.5 $ 145.5 $ 29.6 $ 1.1
Fully diluted shares outstanding at end of period (g).......... 86.4 91.4 102.5 102.4 102.4
Book value per fully diluted share............................. $ 1.73 $ 1.79 $ 1.42 $ .29 $ .01
STATEMENT OF OPERATIONS DATA:
Revenues (d),(e)............................................... $ 28.3 $ 16.7 $ 21.4 $ 34.0 $ 44.8
Loss from continuing operations (e),(f)........................ (41.9) (20.1) (18.7) (116.9) (28.9)
Net income (loss) (f).......................................... (38.4) 14.3 (18.0) (116.9) (28.9)
Per common share:
Loss from continuing operations (c),(e),(f).................... (1.44) (.24) (.43) (2.48) (.60)
Net income (loss) (f),(g)...................................... $ (1.32) $ .17 $ (.41) $ (2.48) $ (.60)
Weighted average shares outstanding (g)........................ 29.0 83.0 43.8 47.1 48.3
- ------------------------
(a) The decrease in total assets at December 31, 1993 is primarily due to the
disposition of the Company's investment in Deltec Panamerica S.A. ("Deltec")
and the sale of Lake Superior Land Company ("Lake Superior"). The decrease
in total assets and cash, cash equivalents and short-term investments at
December 31, 1994 is primarily attributable to the funding of project
development costs and general and administrative expenses, as well as funds
deposited into a restricted cash account to secure a $25 million letter of
credit facility related to the Abex litigation. The decreases in cash, cash
equivalents and short term investments at December 31, 1995 and 1996 are
primarily attributable to the funding of project development and
infrastructure costs and general and administrative expenses, partially
offset by sales of real estate held for development or sale. The decrease in
total assets at December 31, 1995 is primarily due to the asset revaluation
of Bolsa Chica and the decrease in cash described above.
(b) The decrease in debt at December 31, 1993 reflects principal repayments on
senior bank debt and the exchange of subordinated debentures in connection
with the sale of Lake Superior and the issuance of 3.4 million shares of
Class A Common Stock of the Company to Libra. The increase in debt at
December 31, 1995 reflects borrowings under new credit agreements to settle
the Abex litigation and construct infrastructure improvements at Rancho San
Pasqual. The decrease in senior bank debt at December 31, 1996 reflects
principal repayments in excess of borrowings for construction of
infrastructure improvements at Rancho San Pasqual. The increase in project
debt at December 31, 1996 reflects borrowings from banks for build-to-suit
projects.
(c) The increase in equity at December 31, 1993 primarily reflects net income
for the year then ended. The decrease in equity at December 31, 1995
reflects the net loss for the year then ended, including the asset
revaluation of Bolsa Chica. The decrease in equity at December 31, 1996
reflects the net loss for the year then ended, primarily due to interest
expense on subordinated debentures.
8
(d) The decrease in 1993 revenues is principally due to a decrease in land sales
and the absence of revenues from a hotel disposed of in 1992, partially
offset by revenues from the Eagle Crest Golf Course which opened in May
1993, and development fees generated by the business acquired from The Koll
Company in September 1993. The increase in 1995 revenues is due to an
increase in land sales and Wentworth By The Sea residential and marina
sales. The increase in 1996 revenues reflects the sale of residential lots
and the Eagle Crest Golf Course at Rancho San Pasqual, the formation of the
Fairbanks Highlands joint venture and the sale of resort/residential lots in
Michigan.
(e) Amounts have been reclassified to present Lake Superior and Deltec as
discontinued operations.
(f) The loss from continuing operations for the year ended December 31, 1993
reflects lower interest expense related to lower debt outstanding, as well
as nonrecurring income of $3 million received upon termination of a put
option agreement with Abex Inc. and a $2 million insurance reimbursement
related to costs incurred in 1992. Net income and net income per common
share for 1993 reflect gains on the dispositions of Lake Superior and Deltec
and an extraordinary gain on debt extinguishment. The loss from continuing
operations, net loss and loss per common share for the year ended December
31, 1995 reflect approximately $121.1 million of charges related to
write-downs of real estate properties, including Bolsa Chica. The loss from
continuing operations, net loss and loss per common share for the year ended
December 31, 1996 is primarily the result of noncash interest charged on the
subordinated debentures.
(g) In July 1992, approximately 19.7 million shares of Class A Common Stock and
42.5 million shares of Series A Preferred Stock were issued in connection
with the merger of a subsidiary of Henley Properties with and into the
Henley Group. The Preferred Stock is not included in the loss per share
calculations except for 1993 since the effect is antidilutive. In December
1993, the Company issued 3.4 million shares of its Common Stock in exchange
for all of Libra's approximately $10.6 million in aggregate principal amount
plus accrued interest of Subordinated Debentures issued by the Company. The
1993 earnings per share calculation includes these newly issued shares,
along with the Preferred Stock and stock options outstanding. In November
1994, the Company issued 2.0 million shares (along with warrants for the
purchase of an additional 2.0 million shares) of its Common Stock in
connection with the acquisition of the Kathryn G. Thompson Company. The
1994, 1995 and 1996 amounts reflect conversion of 1.2 million, an additional
1.0 million and an additional 1.4 million shares, respectively of Preferred
Stock to Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The principal activities of the Company include: (i) obtaining
zoning and other entitlements for land it owns and improving the land for
residential development; (ii) single and multi-family residential construction
in Southern California; and (iii) providing commercial, industrial, retail and
residential development services to third parties, including feasibility
studies, entitlement coordination, project planning, construction management,
financing, marketing, acquisition, disposition and asset management services on
a national and international basis, through its offices throughout California,
and in Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the
residential land owned by the Company is entitled, the Company may sell
unimproved land to other developers or investors; sell improved land to
homebuilders; or participate in joint ventures with other developers, investors
or homebuilders to finance and construct infrastructure and homes. The Company
intends to consider additional real estate acquisition and joint venture
opportunities; however, the Company's immediate strategic goals are to (i)
obtain new financing for development of the Bolsa Chica mesa; (ii) successfully
defend against the litigation challenging the California Coastal Commission's
approval of the Bolsa Chica project; (iii) complete the secondary permitting for
development of the Bolsa Chica mesa; (iv) commence infrastructure construction
on the Bolsa Chica mesa in the fourth quarter of 1997; (v) continue the growth
of the Company's commercial development business on a national and international
basis; and
9
(vi) complete the Recapitalization to deleverage the Company's capital
structure. There can be no assurance that the Company will accomplish, in whole
or in part, all or any of these strategic goals.
Real estate held for development or sale and land held for development (real
estate properties) are carried at the lower of cost or estimated net realizable
value based on undiscounted cash flows. The Company's real estate properties are
subject to a number of uncertainties which can affect the future values of those
assets. These uncertainties include litigation or appeals of regulatory
approvals and availability of adequate capital, financing and cash flow. In
addition, future values may be adversely affected by increases in property
taxes, increases in the costs of labor and materials and other development
risks, changes in general economic conditions, including higher mortgage
interest rates, and other real estate risks such as the demand for housing
generally and the supply of competitive products. Real estate properties do not
constitute liquid assets and, at any given time, it may be difficult to sell a
particular property for an appropriate price. The state of California's economy
has had a negative impact on the real estate market generally, on the
availability of potential purchasers for such properties and upon the
availability of sources of financing for carrying and developing such
properties. However, over the past year, the number of potential purchasers and
capital sources interested in Southern California residential properties appears
to have increased.
LIQUIDITY AND CAPITAL RESOURCES. The principal assets in the Company's
portfolio are residential land which must be held over an extended period of
time in order to be developed to a condition that, in management's opinion, will
ultimately maximize the return to the Company. Consequently, the Company
requires significant capital to finance its real estate development operations.
During the year ended December 31, 1996, the Company borrowed $8.7 million
under its construction loan agreement with Nomura Asset Capital Corporation
("Nomura") to fund infrastructure improvements at its Rancho San Pasqual golf
and residential community in San Diego county. During the year ended December
31, 1996, the Company also completed sales of 218 residential lots at Rancho San
Pasqual to four homebuilders for gross proceeds aggregating approximately $10.1
million. These four homebuilders have rolling options which if exercised would
result in the sale of an additional 230 lots over the next eighteen (18) months
for aggregate gross proceeds approximating $10.4 million. In June 1996, the
Company sold its Eagle Crest Golf Course at Rancho San Pasqual to a nationally
recognized owner/ operator of high-end daily fee golf courses and private
country clubs for $6.1 million. After paying termination related costs to the
operator of the golf course and closing costs, the Company realized net proceeds
of approximately $5 million. During 1996, the Company also formed a joint
venture to develop the Fairbanks Highlands property. Under the terms of the
joint venture agreement, the Company contributed its land to the venture at
market value of $7.6 million in exchange for an initial cash payment of $4
million, a preferred return on its $3.6 million capital contribution and a
continuing partnership interest in the venture. The Company's partner will
manage the day-to-day operations of the venture, provide all construction
financing and expects to build the majority of the homes at the site. Under loan
agreements with Nomura, the Company utilized 90% of such sales and joint venture
proceeds, along with 50% of the net proceeds from Rancho San Pasqual assessment
district reimbursements, to prepay approximately $18.2 million of outstanding
senior bank debt during the year ended December 31, 1996. As of December 31,
1996, the Company had fully utilized its availability under the construction
loan. On February 18, 1997, the Company repaid the remaining balance of its
senior bank debt with a portion of the proceeds from the sale of the Bolsa Chica
lowlands and the Nomura credit facility was terminated.
Historically, sources of capital have included bank lines of credit,
specific property financings, asset sales and available internal funds. The
Company has reported losses since 1991, with the exception of 1993 results which
included gains on dispositions and extinguishment of debt, and expects to report
losses in the foreseeable future. While a significant portion of such losses is
attributable to non-cash asset revaluations and non-cash interest expense on the
Company's subordinated debentures, the Company's capital expenditures for
project development and infrastructure are significant. The Company will
continue to be dependent primarily on real estate asset sales, and cash and cash
equivalents on-hand to fund project
10
development costs for Bolsa Chica and general and administrative expenses during
1997. Following completion of the sale of the Bolsa Chica lowlands in February
1997 and utilization of $6.6 million to repay Nomura, the Company's cash balance
exceeded $15 million. The Company is also seeking new financing for development
of Bolsa Chica and implementing the Recapitalization to deleverage the Company's
capital structure.
FINANCIAL CONDITION.
DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995. The $2.8 million
decrease in cash and cash equivalents primarily reflects spending for Bolsa
Chica project development costs, and general and administrative expenses,
partially offset by approximately $3.6 million in proceeds from land sales at
the Company's resort/residential property in Michigan during the year ended
December 31, 1996, as well as other activity presented in the Statement of Cash
Flows. Restricted cash of $.2 million at December 31, 1996 reflects funds
remaining in escrow accounts for funding certain infrastructure costs at Rancho
San Pasqual.
The $2.9 million decrease in real estate held for development or sale
primarily reflect the sales of residential lots at Rancho San Pasqual, formation
of the Fairbanks Highlands joint venture and the disposition of Oceanside Hills,
partially offset by construction costs for build-to-suit projects in Signal
Hill, California, Phoenix, Arizona and Allen, Texas. The Company has contracted
for these buildings to be sold upon completion of construction in the first
quarter, third quarter and third quarter, respectively, of 1997.
The $4.8 million decrease in operating properties reflects the June 1996
sale of the Eagle Crest Golf Course at Rancho San Pasqual.
The $4.3 million increase in other assets primarily reflects the Company's
$3.6 million joint venture interest in Fairbanks Highlands.
The $6.8 million increase in accounts payable and accrued liabilities
primarily reflects accruals related to the sale of the Bolsa Chica lowlands and
the Recapitalization, along with contractor payments on build-to-suit projects.
The $9.5 million decrease in senior bank debt reflects net prepayments on
the Nomura loans, resulting primarily from sales of 218 residential lots and the
Eagle Crest Golf Course at Rancho San Pasqual and formation of the Fairbanks
Highlands joint venture, partially offset by construction borrowings during the
year ended December 31, 1996.
The $12.5 million increase in project debt reflects borrowings from banks
for the three build-to-suit projects discussed above by subsidiaries of the
Company. The Company has entered into purchase and sale agreements for the sale
of each building upon completion.
The $9.0 million decrease in other liabilities primarily reflects a $4.3
million decrease in accrued pensions and benefits and a $4.2 million decrease
related to the disposition of the Company's interest in the Oceanside Hills
partnership (see Note 7 of Notes to Financial Statements).
DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994. Cash and cash
equivalents aggregated $4.9 million at December 31, 1995 compared with $13.0
million at December 31, 1994. The decrease in cash and cash equivalents
primarily reflects continued investments in Bolsa Chica and Rancho San Pasqual
along with general and administrative expenses, partially offset by proceeds
from asset sales, as well as other activity presented in the Statements of Cash
Flows. Restricted cash of $2.5 million at December 31, 1995 reflects funds
deposited into escrow accounts for funding infrastructure costs at Rancho San
Pasqual. Restricted cash of $7.5 million at December 31, 1994 reflects funds on
deposit to secure a $25 million letter of credit facility arranged to finance
the settlement of the Abex litigation described above (see Notes 6 and 8 to the
Financial Statements).
11
The $5.6 million decrease in real estate held for development or sale is
primarily due to the sale of all residential property at Wentworth, offset by
investments in Rancho San Pasqual infrastructure. The $4.5 million decrease in
operating properties, net is primarily due to the sale of the Wentworth marina
in December 1995.
The $105.8 million decrease in land held for development reflects the
revaluation of the Bolsa Chica property resulting primarily from management's
decision in the fourth quarter of 1995 (following approval of additional funding
by the Ports) to make completing the sale of the lowlands to a public agency a
strategic goal of the Company, along with updated estimates of future cash flows
for the mesa portion of the project reflecting recent market conditions.
The $6.9 million decrease in other assets primarily reflects the March 1995
collection of a note receivable from AV Partnership, the reclassification of a
note receivable to real estate held for development or sale upon acquisition of
title to industrial property in Ontario, California and the refund of a deposit
upon termination of a purchase contract for property adjacent to the Bolsa Chica
site.
The $23.2 million decrease in accounts payable and accrued liabilities
primarily reflects the $22 million settlement of the Abex litigation (see Notes
6 and 8 to the Financial Statements) in February 1995.
The $16.6 million increase in senior bank debt reflects the borrowing of
$15.5 million to fund the Abex settlement (see Note 8 to the Financial
Statements) and $1.1 million of net borrowings to fund infrastructure
construction at Rancho San Pasqual.
The $39.4 million decrease in other liabilities primarily reflects the
recognition of $25.4 million of deferred tax benefits and a reduction of $10.0
million of other tax liabilities during 1995.
RESULTS OF OPERATIONS. The nature of the Company's business is such that
individual transactions often cause significant fluctuations in operating
results from year to year.
1996 COMPARED WITH 1995. The $10.1 million increase in asset sales revenues
from $23.5 million in 1995 to $33.6 million in 1996 and the related $8.6 million
increase in costs of asset sales from $21.6 million in 1995 to $30.2 million in
1996 primarily reflect the sale of the residential lots and Eagle Crest Golf
Course at Rancho San Pasqual, formation of the Fairbanks Highlands joint venture
and sales of resort/ residential lots in Michigan during the year ended December
31, 1996. These increases were partially offset by the absence in 1996 of
Wentworth residential sales as a result of the sale of the entire Wentworth
project in the fourth quarter of 1995. The $1.5 million improvement in gross
margin on asset sales primarily reflects gains on sales of Michigan lots,
partially offset by the absence in 1996 of the gains on sales of the Coronado
wharfage rights and leasehold interest in 1995.
The $.7 million and $1.0 million increases in revenues and gross margin,
respectively, from operations primarily reflect higher revenues in the Company's
commercial development business during the year ended December 31, 1996,
partially offset by the absence of Wentworth marina revenues throughout 1996 and
the sale of the Eagle Crest Golf Course in June 1996.
The $1.9 million increase in general and administrative expenses primarily
reflects costs incurred in connection with the Recapitalization and the sale of
the Bolsa Chica lowlands.
The $2.3 million increase in interest expense from $22.6 million in 1995 to
$24.9 million in 1996 principally reflects compounded noncash interest on the
Company's senior subordinated debentures and subordinated debentures.
The $4.2 million decrease in other expense, net primarily reflects the
absence in 1996 of a $3.0 million reserve recorded in 1995 related to the
Company's investment in AV Partnership, and a decrease in accrued pensions and
benefits approximating $4.3 million, primarily due to termination of certain
group annuity contracts for the pension plan of a discontinued operation,
partially offset by a $1.5 million reserve for environmental clean up costs for
the Bolsa Chica lowlands.
12
The benefit for income taxes for the year ended December 31, 1996 has been
offset by a corresponding valuation allowance.
1995 COMPARED WITH 1994. The $12.6 million increase in revenues from $21.4
in 1994 to $34.0 in 1995 and the increase in cost of sales from $20.2 million in
1994 to $31.9 million in 1995 was primarily due to the sale of residential
property and the marina at Wentworth, along with the sale of industrial property
in Murietta, California, and the sale of wharfage rights in Coronado,
California.
The write-down of real estate properties of $121.1 million in 1995 reflects
the valuation adjustments recorded to reflect current estimates of net
realizable value for the Company's Bolsa Chica property (see Note 5 to the
Financial Statements) as well as the Wentworth project and the golf course at
Rancho San Pasqual.
The change in other expense (income), net from $2.1 million of expense in
1994 to $3.1 million of expense for 1995 primarily reflects a loss reserve of
approximately $3 million related to the Company's investment in AV Partnership
(see Note 3 to the Financial Statements).
The improvement in provision (benefit) for income taxes of $25.2 million
primarily reflects the benefit related to the write-down of real estate
properties (see Note 8 to the Financial Statements).
1994 COMPARED WITH 1993. The $4.7 million increase in revenues from $16.7
million in 1993 to $21.4 million in 1994 and the increase in cost of sales from
$16.3 million in 1993 to $20.2 million in 1994 were both principally related to
operations of the domestic real estate development business acquired from The
Koll Company in September 1993, as well as residential home sales and the golf
course sale at the Company's Wentworth By The Sea project during 1994, offset by
the absence in 1994 of the Company's November 1993 sale of two office buildings
in La Jolla, California.
The decrease in interest expense from $24.4 million in 1993 to $19.4 million
in 1994 reflects both the reductions in outstanding subordinated debt in
connection with the Libra transaction in December 1993 and prepayments of senior
bank debt principally during 1993 (see Note 6 to the Financial Statements).
The change in other expense (income), net from $2.4 million of income in
1993 to $2.1 million of expense for 1994 primarily reflects nonrecurring income
of $3.0 million received in August 1993 in connection with the termination of a
put option agreement with Abex a former subsidiary of The Henley Group, Inc.,
and a $2.0 million insurance reimbursement received in February 1993, offset by
$.7 million of carrying costs related to the two La Jolla office buildings sold
in November 1993.
The gain on disposition of discontinued operations, net of income taxes in
1994 reflects the receipt of cash for the February 1994 termination of the
contingent payment provision of a December 1993 agreement with Libra whereby the
Company exchanged its Lake Superior Land Company subsidiary for approximately
$42.4 million face amount of the Company's senior subordinated debentures held
by Libra and other consideration. (see Note 3 to the Financial Statements).
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain of the foregoing information is forward looking in nature and
involves risks and uncertainties that could significantly impact the ability of
the Company to achieve its currently anticipated goals and objectives. These
risks and uncertainties include, but are not limited to, litigation or appeals
of regulatory approvals (including pending litigation challenging the California
Coastal Commission's approval of the Bolsa Chica project) and availability of
adequate capital, financing and cash flow. In addition, future values may be
adversely affected by increases in property taxes, increases in the costs of
labor and materials and other development risks such as the demand for housing
generally and the supply of competitive products. Real estate properties do not
constitute liquid assets and, at any given time, it may be difficult to sell a
particular property for an appropriate price.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, schedules and supplementary data of the Company and
its subsidiaries, listed under Item 14, are submitted as a separate section of
this Annual Report, commencing on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The Board of Directors of the Company consists of Donald M. Koll
(Chairman), Ray Wirta, Harold A. Ellis, Jr., Paul C. Hegness, J. Thomas Talbot,
and Marco F. Vitulli. Under the Restated Certificate of Incorporation and the
Amended By Laws of the Company, the members of the Board of Directors are
divided into three classes with each class having a term of three years.
Information about the directors is set forth below:
NAME AGE* BUSINESS EXPERIENCE
- ------------------------- ---- -----------------------------------------------
Donald M. Koll 63 See "Executive Officers of the Company" in Item
1 of this Annual Report. Mr. Koll's director
class will be up for election in connection
with the Company's 1997 Annual Meeting.
Ray Wirta 52 Director of the Company since March 1993. Chief
Executive Officer of the Company from March
1993 until October 1996. President and Chief
Operating Officer of Koll since prior to 1992.
Vice Chairman of the Board and Chief Executive
Officer of KRES since prior to 1992. Mr.
Wirta's director class will be up for election
in connection with the Company's 1997 Annual
Meeting.
Harold A. Ellis 65 Director of the Company since August 1993.
Managing Partner of Ellis Partners, Inc., a
real estate asset management and consulting
firm since 1992. Chairman and Chief Executive
Officer of Grubb & Ellis Company, a diversified
real estate service company prior to 1992. Mr.
Ellis's director class will be up for election
in connection with the Company's 1997 Annual
Meeting.
Paul C. Hegness 49 Director of the Company since March 1993.
Partner in the law firm of Good, Wildman,
Hegness & Walley since prior to 1992. Also a
Director of Walter Foster Publishing, a
publisher and marketer of art instructional
materials. Mr. Hegness's director class will be
up for election in connection with the
Company's 1997 Annual Meeting.
J. Thomas Talbot 61 Director of the Company since August 1993.
Owner of The Talbot Company, an investment and
asset management company since prior to 1992.
Chief Executive Officer of HAL, Inc., the
parent company of Hawaiian Airlines prior to
1992. Also a Director of The Baldwin Company, a
developer of residential real estate; The
Hallwood Group, Inc., a corporate rescue firm;
Showbiz Pizza Time, Inc., a restaurant chain;
and Fidelity National Financial, Inc. a title
company. Mr. Talbot's term expires in 1998.
Marco F. Vitulli 61 Director of the Company since March 1993.
President of Vitulli Ventures, Ltd., a real
estate development, investment management and
consulting services company since prior to
1992. Chairman of Elk River Enterprises, a
lumber company, and Director of Pope Resources,
a land, timber, mineral and recreational
properties company. Mr Vitulli's term expires
in 1998.
- ------------------------
* As of December 31, 1996
EXECUTIVE OFFICERS. Information with respect to executive officers appears
under the caption "Executive Officers of the Company" in Item 1 of this Annual
Report.
COMPLIANCE WITH SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Section 16 of the Securities and Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than 10%
of a registered class of the Company's equity
15
securities to file various reports with the Securities and Exchange Commission
and the National Association of Securities Dealers concerning their holdings of,
and transactions in, securities of the Company. Copies of these filings must be
furnished to the Company.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that there was compliance for the fiscal year
ended December 31, 1996 with all Section 16(a) filing requirements applicable to
the Company's officers, directors and greater than 10% beneficial owner.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table summarizes the compensation
paid during the previous three fiscal years to the Chief Executive Officer and
the Company's other executive officers whose salary and bonus during 1996
exceeded $100,000 (the "Named Executives") for services in all capacities to the
Company.
LONG TERM COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------------------------
------------------------------------- 1993
OTHER RESTRICTED PLAN ALL
ANNUAL STOCK OPTIONS OTHER
SALARY BONUS COMPENSATION AWARD (# OF COMPENSATION
NAME AND PRINCIPAL POSITION ($)(1) ($) ($) ($) SHARES) ($)
- --------------------------------- ------------ ------------ -------------- ----------- ------------ --------------
Donald M. Koll .................. 1996 330,200 275,000(3) -- -- -- --
Chairman of the Board and 1995 325,000 -- -- -- -- --
Chief Executive Officer 1994 325,000 -- -- -- -- --
Ray Wirta ....................... 1996 103,750(2) 125,000(3) -- -- -- --
Former Chief Executive 1995 225,000 -- -- -- -- --
Officer 1994 225,000 -- -- -- -- --
Richard Ortwein ................. 1996 359,600 250,000(3) 13,841(5) -- -- --
President 1995 359,858 -- -- -- -- --
1994 274,197 18,500 -- -- -- --
--
Raymond J. Pacini ............... 1996 268,000 100,000(3) -- -- -- 76,725(6)
Executive Vice President 1995 268,000 200,000(4) -- -- -- --
and Chief Financial 1994 268,000 150,000 -- -- -- --
Officer
- ------------------------
(1) Includes auto allowance and amounts electively deferred by each Named
Executive under the Company's 401(k) Savings and Profit Sharing Plan. Mr.
Koll and Mr. Wirta are also executive officers of The Koll Company and its
affiliates and accordingly devote less than all of their working time to the
Company's business matters.
(2) Reduced to $95,000 per year effective April 1, 1996 and to $0 effective
October 1, 1996 to reflect a reduction in his day-to-day involvement with
the Company in view of his commitment to devote a greater percentage of his
time to the business of an affiliate of the Company. Effective October 1,
1996, Mr. Wirta receives a consulting fee equivalent to $50,000 per year.
(3) Bonuses for 1996 were paid following the closing of the Bolsa Chica lowlands
sale in February 1997.
(4) In the first quarter of 1996, Mr. Pacini voluntarily elected to defer
consideration of his 1995 bonus given the Company's liquidity situation. In
September 1996, the Compensation Committee of the Company's Board of
Directors approved Mr. Pacini's bonus for accomplishments during 1995, which
was paid following the closing of the Bolsa Chica lowlands sale in February
1997.
(5) Partnership distributions.
(6) Reflects a one-time payment representing Mr. Pacini's pro-rata share of
assets distributed from a trust in connection with termination of the
Company's Executive Retirement and Savings Program.
16
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUE. The following table sets forth information for each Named
Executive with regard to the aggregate stock options exercised during the 1996
fiscal year, and stock options held as of December 31, 1996. On December 31,
1996, options exercisable by the Named Executives were for 2,400,000 shares,
2,000,000 shares, 2,400,000 shares and 2,200,000 shares under options granted to
Messrs. Koll, Wirta, Ortwein and Pacini, respectively. No stock appreciation
rights were exercised by the Named Executives during the 1996 fiscal year, nor
did such individuals hold any stock appreciation rights at the end of such
fiscal year.
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
VALUE UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED REALIZED OPTIONS/SARS OPTIONS/SARS
NAME ON EXERCISE (#) ($)(1) AT FY-END AT FY-END ($)(2)
- ------------------------------------ --------------- ------------- --------------------- -------------------
Donald M. Koll...................... -- -- 2,400,000 --
Ray Wirta........................... -- -- 2,000,000 --
Richard Ortwein..................... -- -- 2,400,000 --
Raymond J. Pacini................... -- -- 2,200,000 $ 27,490
- ------------------------
(1) Market value of underlying securities on exercise date, minus the exercise
price.
(2) Based upon market value of $.1250 for the Class A Common Stock and $.28125
for the Preferred Stock as of December 31, 1996 less the aggregate exercise
price payable for such shares. Includes the value of the 2,400,000 shares,
2,000,000 shares, 2,400,000 shares and 2,200,000 shares subject to currently
exercisable options by Messrs. Koll, Wirta, Ortwein and Pacini,
respectively.
EXECUTIVE RETIREMENT AND SAVINGS PROGRAM
The Company maintains two retirement benefit programs, one of which was
terminated in 1996: a tax-qualified defined benefit pension plan which was
available generally to all employees (the "Pension Plan") and the Retirement and
Savings Program, a non-qualified supplemental benefit plan pursuant to which
retirement benefits were provided to executive officers and other eligible key
management employees who were designated by the Compensation Committee, which
determined the service recognized under the program in calculating a
participant's vested interest and retirement income (the "Supplemental Plan"
and, together with the Pension Plan the "Retirement Program"). As of December
31, 1993, all benefits under the Pension Plan were frozen, and no further
compensation or years of service will be taken into account for additional
benefit accrual purposes, under the Pension Plan. The Supplemental Plan was
terminated effective November 15, 1996 through the distribution of assets held
in trust to the beneficiaries of the Supplemental Plan in exchange for the
beneficiaries release of all claims to any future benefits under the
Supplemental Plan.
The following table shows as of the date the Pension Plan was frozen the
total estimated annual benefits payable under the Retirement Program in the form
of a 50% joint and survivor annuity to hypothetical participants upon retirement
at normal retirement age, in the compensation and years-of-service categories
indicated in the table.
ESTIMATED ANNUAL BENEFITS
ANNUALIZED -----------------------------------------------
AVERAGE 10 YEARS 20 YEARS 30 YEARS 40 YEARS
EARNINGS OF SERVICE OF SERVICE OF SERVICE OF SERVICE
- ----------- ----------- ---------- ---------- ----------
$ 100,000 $ 15,000 $ 30,000 $ 45,000 $ 60,000
200,000 30,000 60,000 90,000 120,000
400,000 60,000 120,000 180,000 240,000
The years of service recognized under the Retirement Program generally
included all service with the Company and its subsidiaries and their
predecessors. The only credited years of service to the Named Executives as of
the date the Pension Plan was frozen were seven years to Mr. Pacini.
Compensation
17
recognized under the Retirement Program generally included a participant's base
salary (including any portion deferred) and annual bonus compensation.
COMPENSATION OF DIRECTORS
The non-employee directors of the Company are entitled to receive cash
compensation and compensation pursuant to the plans described below.
CASH COMPENSATION. Non-employee directors of the Company receive
compensation of $30,000 per year, with no additional fees for attendance at
Board or committee meetings. Messrs. Ellis, Hegness and Vitulli were paid an
additional $10,000, $20,000 and $7,000, respectively, for consulting services
rendered during 1996. Employee directors are not paid any fees or additional
compensation for service as members of the Board or any of its committees. All
directors are reimbursed for expenses incurred in attending Board and committee
meetings. Pursuant to the Deferred Compensation Plan for Non-Employee Directors,
a non-employee director may elect, generally prior to the commencement of any
calendar year, to have all or any portion of the director's compensation for
such calendar year credited to a deferred compensation account. Amounts credited
to the director's account will accrue interest based upon the average quoted
rate for ten-year U.S. Treasury Notes. Deferred amounts will be paid in a lump
sum or in installments commencing on the first business day of the calendar year
following the year in which the director ceases to serve on the Board, or of a
later calendar year specified by the director.
1993 STOCK OPTION/STOCK ISSUANCE PLAN. The Company's 1993 Stock
Option/Stock Issuance Plan (the "1993 Plan") contains three separate equity
incentive programs in which members of the Board may be eligible to participate:
(i) a Discretionary Option Grant Program, under which eligible non-employee
members of the Board, along with officers, key employees and consultants, may be
granted options to purchase shares of Preferred Stock and Class A Common Stock,
(ii) a Director Fee Program, under which each non-employee member of the Board
may elect to apply all or any portion of his or her annual retainer fee
(currently $30,000) to the acquisition of unvested shares of Preferred Stock or
Class A Common Stock, and (iii) an Automatic Option Grant Program, under which
option grants will be made to non-employee members of the Board.
Options granted under the Discretionary Option Grant Program may be either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the Automatic Option Grant Program will be
non-statutory options.
No individual participating in the 1993 Plan may be granted stock options or
separately exercisable stock appreciation rights for more than 5,000,000 shares
of Class A Common Stock and Preferred Stock in the aggregate over the term of
the 1993 Plan.
PLAN ADMINISTRATION. The Discretionary Option Grant Program is administered
by the Compensation Committee of the Board, which is comprised of two or more
non-employee Board members appointed by the Board. The Compensation Committee,
as "Plan Administrator," has complete discretion (subject to the express
provisions of the 1993 Plan) to authorize stock option grants. All grants under
the Automatic Option Grant and Director Fee Programs are made in strict
compliance with the express provisions of those programs, and no administrative
discretion is exercised by the Plan Administrator with respect to the grants or
stock issuances made under those programs.
DISCRETIONARY OPTION GRANT PROGRAM. The principal features of the
Discretionary Option Grant Program may be summarized as follows:
The exercise price per share of the Preferred Stock or Class A Common Stock
subject to a stock option will not be less than 100% of the fair market value
per share of that security on the grant date. No option will have a maximum term
in excess of ten years measured from the grant date. The Plan
18
Administrator has complete discretion to grant options (i) which are immediately
exercisable for vested shares, (ii) which are immediately exercisable for
unvested shares subject to the Company's repurchase rights, or (iii) which
become exercisable in installments for vested shares over the optionee's period
of service. Non-employee members of the Board who serve as Plan Administrator
are not eligible to participate in the Discretionary Option Grant Program.
The exercise price may be paid in cash or in shares of Preferred Stock or
Class A Common Stock valued at fair market value on the exercise date. The
option may also be exercised for vested shares through a same-day sale program
pursuant to which the purchased shares are to be sold immediately and a portion
of the sale proceeds applied to the payment of the exercise price for those
shares on the settlement date.
Any option held by the optionee at the time of cessation of service will
normally not remain exercisable beyond the limited period designated by the Plan
Administrator (not to exceed 36 months) at the time of the option grant. During
that period, the option will generally be exercisable only for the number of
shares in which the optionee is vested at the time of cessation of service. For
purposes of the 1993 Plan, an individual will be deemed to continue in service
for so long as that person performs services on a periodic basis for the Company
or any parent or subsidiary corporations, whether as an employee, a non-employee
member of the Board or an independent consultant or advisor.
The Plan Administrator has complete discretion to extend the period
following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability of
such options in whole or in part. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
Any unvested shares of Preferred Stock and Class A Common Stock are subject
to repurchase by the Company, at the original exercise price paid per share,
upon the optionee's cessation of service prior to vesting in those shares. The
Plan Administrator has complete discretion in establishing the vesting schedule
for any such unvested shares and has full authority to cancel the Company's
outstanding repurchase rights with respect to those shares in whole or in part
at any time.
The optionee is not to have any stockholder rights with respect to the
option shares until the option is exercised and the exercise price is paid for
the purchased shares. Options are not assignable or transferable other than by
will or by the laws of inheritance following the optionee's death, and the
option may, during the optionee's lifetime, be exercised only by the optionee.
The Plan Administrator may grant options with stock appreciation rights.
Stock appreciation rights provide the holders with the right to surrender their
options for an appreciation distribution from the Company equal in amount to the
excess of (i) the fair market value of the vested shares of Preferred Stock or
Class A Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such vested shares. Such appreciation distribution
may, in the discretion of the Plan Administrator, be made in cash or in shares
of the Preferred Stock or Class A Common Stock.
DIRECTOR FEE PROGRAM. Under the Director Fee Program, each individual
serving as a non-employee Board member is eligible to elect to apply all or any
portion of the annual retainer fee otherwise payable in cash to such individual
(currently $30,000) to the acquisition of unvested shares of Preferred Stock
and/or Class A Common Stock. The non-employee Board member must make the stock
election prior to the start of the calendar year for which the election is to be
in effect. On the first trading day in January of the calendar year for which
the election is in effect, the portion of the retainer fee subject to such
election will be applied to the acquisition of the selected shares of Preferred
Stock and/or Class A Common Stock by dividing the elected dollar amount by the
closing selling price per share of Preferred Stock or Class A Common Stock (as
the case may be) on that trading day. The issued shares will be held in escrow
by the Company until the individual vests in those shares. The non-employee
Board member will have full
19
stockholder rights, including voting and dividend rights, with respect to all
issued shares held in escrow on his or her behalf.
Upon completion of each calendar quarter of Board service during the year
for which the election is in effect, the non-employee Board member will vest in
one-fourth of the issued shares, and the stock certificate for those shares will
be released from escrow. Immediate vesting in all the issued shares will occur
in the event the individual dies or becomes disabled during his or her period of
Board service or certain changes in control or ownership of the Company are
effected during such period. Should the Board member cease service prior to
vesting in one or more quarterly installments of the issued shares, then those
installments will be forfeited, and the individual will not be entitled to any
cash payment from the Company with respect to the forfeited shares.
In 1996 no shares were received in lieu of the cash retainer fee.
AUTOMATIC OPTION GRANT PROGRAM. Under the Automatic Option Grant Program
which will be terminated if the Recapitalization is consummated, each individual
who was serving as a non-employee Board member on November 29, 1993 (the
"Effective Date") was automatically granted a non-statutory option to purchase
125,000 shares of Preferred Stock and a non-statutory option to purchase 125,000
shares of Class A Common Stock. In addition, each individual who first becomes a
non-employee Board member on or after the Effective Date, whether through
election by the Company's stockholders or appointment by the Board, will be
automatically granted at the time of such election or appointment a
non-statutory option to purchase 125,000 shares of Preferred Stock and a
non-statutory option to purchase 125,000 shares of Common Stock. However, no
non-employee Board member who has previously been in the employ of the Company
or any parent or subsidiary corporation will be eligible to receive these
automatic stock option grants.
Each option granted under the Automatic Option Grant Program is subject to
the following terms and conditions:
(1) The exercise price per share of the Preferred Stock or Class A
Common Stock subject to an automatic option grant will be equal to 100% of
the fair market value per share of that security on the automatic option
grant date.
(2) Each option will have a maximum term of ten years measured from the
grant date.
(3) Each option will be immediately exercisable for all the option
shares, but any purchased shares will be subject to repurchase by the
Company at the exercise price paid per share. Each option will vest, and the
Company's repurchase right will lapse as to (i) 40% of the option shares
upon the optionee's completion of one year of Board service measured from
the automatic grant date, and (ii) the remaining option shares in two equal
and successive annual installments over the optionee's period of continued
Board service, with the first such installment to vest two years after the
automatic option grant date.
(4) The option will remain exercisable for a six-month period following
the optionee's cessation of Board service for any reason other than death or
permanent disability. Should the optionee die while holding an automatic
option grant, then such option will remain exercisable for a twelve-month
period following the optionee's death and may be exercised by the personal
representative of the optionee's estate or the person to whom the grant is
transferred by the optionee's will or the laws of inheritance. In no event,
however, may the option be exercised after the expiration date of the option
term. During the applicable exercise period, the option may not be exercised
for more than the number of shares (if any) in which the optionee is vested
at the time of cessation of Board service.
(5) Should the optionee die or become permanently disabled while serving
as a Board member, then the shares of the Preferred Stock and Class A Common
Stock subject to any automatic option grant held by that optionee will
immediately vest in full, and those vested shares may be purchased at
20
any time within the twelve-month period following the date of the optionee's
cessation of Board service.
(6) The shares subject to each automatic option grant will vest in full
upon the occurrence of certain changes in control or ownership of the
Company, as explained in more detail below in the subsection entitled
Option/Vesting Acceleration.
(7) Upon the successful completion of a hostile tender offer for
securities possessing more than 50% of the combined voting power of the
Company's outstanding securities, each automatic option grant which has been
outstanding for at least six months may be surrendered to the Company for a
cash distribution per surrendered option share in an amount equal to the
excess of (i) the highest price per share of the Preferred Stock or Class A
Common Stock paid in such tender offer over (ii) the exercise price payable
for such share.
(8) The remaining terms and conditions of the option will in general
conform to the terms described above for option grants made under the
Discretionary Option Grant Program and will be incorporated into the option
agreement evidencing the automatic option grant.
FINANCIAL ASSISTANCE. The Plan Administrator may institute a loan program
in order to assist one or more optionees in financing their exercise of
outstanding options under the Discretionary Option Grant Program. The form in
which such assistance is to be made available (including loans or installment
payments) and the terms upon which such assistance is to be provided will be
determined by the Plan Administrator. However, the maximum amount of financing
provided any individual may not exceed the amount of cash consideration payable
for the issued shares plus all applicable Federal, state and local income and
employment taxes incurred in connection with the acquisition of the shares. Any
such financing may be subject to forgiveness in whole or in part, at the
discretion of the Plan Administrator, over the individual's period of service.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, and its members are named below. No member of
the Compensation Committee was at any time during the 1996 fiscal year or at any
other time an officer or employee of the Company. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity which has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee. Good, Wildman,
Hegness & Walley, a law firm with which Mr. Hegness is a senior partner,
provides legal services to the Company.
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE AND STOCK PRICE
PERFORMANCE COMPARISON GRAPH SHALL NOT BE DEEMED TO BE SOLICITING MATERIAL AND
SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT
INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY FILING UNDER THE
SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE ACT OF 1934, AND SHALL
NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
REPORT OF THE COMPENSATION COMMITTEE
The overall objectives of the Company compensation program are to attract
and retain the best possible executive talent, to motivate these executives to
achieve the goals inherent in the Company's business strategy, to maximize the
link between executive and stockholder interests through an equity based plan
and to recognize individual contributions as well as overall business results.
The key elements of the Company's executive compensation program consist of
fixed compensation in the form of base salary, and variable compensation in the
forms of annual incentive compensation and stock options. An executive officer's
annual base salary represents the fixed component of his total compensation;
however, variable compensation is intended to comprise a substantial portion of
an executive's total annual compensation. The Compensation Committee also takes
into account the fact that executives may also provide services to, and receive
compensation from, other entities. In addition, while
21
the elements of compensation described below are considered separately, the
Compensation Committee takes into account the full compensation package afforded
by the Company to the individual, including any pension benefits, supplemental
retirement benefits, insurance and other benefits, as well as the programs
described below.
BASE SALARIES. Base salaries for executive officers are determined by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the competitive marketplace for executive talent
including, where appropriate, a comparison to base salaries for comparable
positions at other companies, and to historical levels of salary paid by the
Company and its predecessors. Current base salaries for the Company's executive
officers are at or below the 75th percentile of the compensation data surveyed
during the first quarter of 1994. Since then, the only executive officer salary
increase granted was to Mr. Ortwein in order to bring his salary closer to
comparable levels.
Salary adjustments are based on a periodic evaluation of the performance of
the Company and of each executive officer, and also take into account new
responsibilities as well as changes in the competitive market place. The
Compensation Committee, where appropriate, also considers non-financial
performance measures.
ANNUAL INCENTIVE COMPENSATION AWARDS. The variable compensation payable
annually to executive officers is intended to consist principally of annual
incentive compensation awards, based on various factors, including both
corporate and individual performance, established by the Compensation Committee
each fiscal year. The executive officer bonuses for 1996 were paid upon
completion of the Bolsa Chica lowlands sale in February 1997 in recognition of
such officers' accomplishments during 1996, particularly with respect to
obtaining the California Coastal Commission's approval of the Bolsa Chica
project and progress made towards the ultimate sale of the lowlands.
OTHER INCENTIVE COMPENSATION. Participation of executives in equity-based
compensation programs is reviewed annually, and awards under such programs,
primarily in the form of stock option grants under the Company's 1993 Stock
Option/Stock Issuance Plan, are made periodically to the executives. Each option
grant is designed to align the interests of the executive with those of the
stockholders and provide each individual with a significant incentive to manage
the Company from the perspective of an owner with an equity stake in the
business. The number of shares subject to each option grant is based upon the
executive's tenure, level of responsibility and relative position in the
Company. The Compensation Committee has established certain general guidelines
in making option grants to the executives in an attempt to target a fixed number
of option shares based upon the individual's position with the Company and his
existing holdings of options. However, the Company does not adhere strictly to
these guidelines and will vary the size of the option grant made to each
executive officer as it feels the circumstances warrant. In connection with the
Recapitalization, the Compensation Committee approved the grant of options
effective upon the consummation of the Recapitalization equivalent to 2.5%, .5%,
1.5% and 1.5% of the Company's fully diluted equity to Messrs. Koll, Wirta,
Ortwein and Pacini, respectively. The price of such options will be determined
by the 20-day average closing price following completion of the
Recapitalization. Each grant allows the executive to acquire shares of the
Company's stock at a fixed price per share (the market price on the grant date)
over a specified period of time (up to 10 years). The options vest in periodic
installments over a three-year period, generally contingent upon the executive
officer's continued employment with the Company, provided, that if the executive
is terminated without cause, such options shall immediately become 100% vested.
Accordingly, the option will generally provide a return to the executive only if
he remains in the Company's employ and the market price of the Common Stock and
Preferred Stock appreciates over the option term.
CEO COMPENSATION. The base salary established for the Company's current and
former Chief Executive Officer, Messrs. Koll and Wirta, respectively, reflects
the Committee's policy to maintain a relative level of stability and certainty
with respect to the CEO's base salary from year to year. In setting the CEO's
base salary, the Committee sought to accomplish three objectives: provide a
level of base salary
22
competitive to that paid to other chief executive officers in the industry
(recognizing that Messrs. Koll and Wirta are each an executive officer of
affiliate companies and accordingly devote less than all of their working time
to the Company's business matters), maintain internal comparability and have
their base salary play a less central role in their overall compensation package
by reason of the option grants made to them in lieu of a more substantial
increase in their level of base salary. The CEO's current base salary is below
the average of the surveyed compensation data for similarly situated chief
executive officers in the industry. The CEO's bonus for 1996 was paid upon
completion of the Bolsa Chica lowlands sale in February 1997 in recognition of
such officer's accomplishments during 1996, particularly with respect to
obtaining the California Coastal Commission's approval of the Bolsa Chica
project and progress made towards the ultimate sale of the lowlands.
TAX LIMITATION. The cash compensation to be paid to each of the Company's
executive officers for the 1995 fiscal year is not expected to exceed the
$1,000,000 limit on the tax deductibility of such compensation imposed under
federal tax legislation enacted in 1993. In addition, the Company's 1993 Plan
imposes a limit on the maximum number of shares of the Company's common and
preferred stock for which any one participant may be granted stock options over
the remaining term of the plan. Any compensation deemed paid to an executive
officer upon the exercise of an outstanding option under the 1993 Plan will
qualify as performance-based compensation which will not be subject to the
$1,000,000 limitation. No other changes to the Company's executive compensation
programs will be made as a result of the new limitation until final Treasury
Regulations are issued with respect to such limitation.
The Compensation Committee
of the Board of Directors:
J. Thomas Talbot, Chairman
Harold A. Ellis, Jr.
Paul C. Hegness
Marco F. Vitulli
23
STOCK PRICE PERFORMANCE COMPARISON
The following graph illustrates the return during the past five years that
would have been realized on December 31 of each year (assuming reinvestment of
dividends) by an investor who invested $100 on December 31, 1991 in each of (i)
the Company's Class A Common Stock, (ii) the Media General Composite Market
Value Index ("Media General Index"), and (iii) the Wilshire Real Estate
Securities Index of Real Estate Operating Companies ("Real Estate Index") which
consists of 12 real estate operating and development companies.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
THE COMPANY, REAL ESTATE INDEX AND MEDIA GENERAL INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE COMPANY REAL ESTATE INDEX MEDIA GENERAL INDEX
12/31/91 $100.00 $100.00 $100.00
12/31/92 $36.36 $90.61 $104.00
12/31/93 $63.64 $108.18 $119.39
12/31/94 $68.19 $102.10 $118.39
12/31/95 $45.45 $125.34 $153.50
12/31/96 $18.18 $171.55 $185.38
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996, the name and
address of each person believed to be a beneficial interest holder of more than
5% of the Common Stock, the number of shares beneficially owned and the
percentage so owned. Except as set forth below, management knows of no person
who, as of December 31, 1996, owned beneficially more than 5% of the Company's
outstanding Class A Common Stock.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL INTEREST HOLDER BENEFICIAL OWNERSHIP CLASS(1)
- ------------------------------------- -------------------------------------- ----------------------- -------------
Class A Common Stock................. Bridge Partners, L.P. 17,518,200 shares(2) 28.8(2)
115 East Putnam Avenue
Greenwich, CT 06830
Class A Common Stock................. Wheelabrator Technologies Inc. 5,097,207 shares(3) 9.8(3)
Liberty Lane
Hampton, NH 03842
Class A Common Stock................. Asher B. Edelman 3,477,700 shares(4) 6.6(4)
717 Fifth Avenue
New York, NY 10022
Class A Common Stock................. Mentor Partners, L.P. 3,162,500 shares(5) 6.1(5)
500 Park Avenue
New York, NY 10022
Class A Common Stock................. Merrill Lynch & Co., Inc. 2,851,692 shares(6) 5.6(6)
World Financial Center
North Tower
250 Vesey Street
New York, NY 10281
- ------------------------
(1) These percentages are calculated assuming the conversion of all securities
convertible within 60 days into the Company's Class A Common Stock which are
held by the individual beneficial interest holder of more than 5% listed in
the table above, but not those held by others.
(2) According to Schedule 13D dated July 14, 1995 filed jointly with the
Securities and Exchange Commission (the "SEC") by Mr. John W. Gildea
("Gildea"), Carson Street Partners, Inc. ("Carson"), and Bridge Partners,
L.P. ("Bridge"). Carson is the sole general partner of Bridge and has the
power to vote and dispose of shares. Gildea is the Chairman of the Board of
Directors, Chief Executive Officer, President and controlling stockholder of
Carson. As a result, Gildea and Carson may be deemed to be the indirect
beneficial interest holders of the shares held by Bridge, a partnership
whose general partner is controlled by Gildea. Gildea disclosed that through
Bridge and Carson, as of that date, he was the beneficial interest holder of
17,518,200 shares of Class A Common Stock, as to which he had sole voting
and dispositive power. This number includes 11,878,800 shares of Preferred
Stock which shares are generally nonvoting and are currently convertible
into shares of the Class A Common Stock on a share-for-share basis.
(3) According to the Company's records, including shares held by wholly-owned
subsidiaries. This number includes 3,339,198 shares of Preferred Stock which
shares are generally nonvoting and are currently convertible into shares of
the Class A Common Stock on a share-for-share basis.
(4) According to Schedule 13D (Amendment No. 1) dated December 5, 1996 filed
jointly with the SEC by Mr. Asher B. Edelman; Edelman Value Partners, L.P.;
Edelman Value Fund, Ltd.; and A.B. Edelman Management Company, Inc.
(collectively, "Edelman"). Edelman is the beneficial owner of 3,477,700
shares of Preferred Stock which shares are generally non-voting and are
currently convertible into shares of the Class A Common Stock on a
share-for-share basis.
25
(5) According to Schedule 13D (Amendment No. 3) dated October 31, 1996. Mentor
Partners, L.P. is the beneficial owner of an aggregate of 3,162,500 shares,
including 530,000 shares of Class A Common Stock and 2,632,500 shares of
Preferred Stock which shares are generally non-voting and are currently
convertible into shares of the Class A Common Stock on a share-for-share
basis.
(6) According to Schedule 13G dated February 11, 1994 filed jointly with the SEC
by Merrill Lynch & Co., Inc. and Merrill Lynch Pierce, Fenner & Smith
Incorporated (collectively "Merrill"). Merrill beneficially owns an
aggregate of 2,851,692 shares, including 957,246 shares of Class A Common
Stock and 1,894,446 shares of Preferred stock which shares are generally
non-voting and are currently convertible into shares of the Class A Common
Stock on a share-for-share basis.
Information about the beneficial ownership of the Common Stock as of
December 1, 1996 by each nominee, director, executive officer named in the
Summary Compensation Table, and all directors and executive officers of the
Company as a group is set forth below:
SHARES OF CLASS A PERCENT OF
NAME OF BENEFICIAL INTEREST HOLDER COMMON STOCK(1) CLASS(2)
- --------------------------------------------------------------- ----------------- -------------
Donald M. Koll(3).............................................. 2,436,701 4.7
Ray Wirta(4)................................................... 2,040,000 4.0
Harold A. Ellis, Jr.(5)........................................ 293,263 *
Paul C. Hegness(5)............................................. 360,571 *
J. Thomas Talbot(5)............................................ 252,000 *
Marco F. Vitulli(5)............................................ 371,000 *
Richard Ortwein(3)............................................. 2,407,340 4.7
Raymond J. Pacini(6)........................................... 2,223,434 4.3
Directors and Executive Officers as a group (8 persons
including the above named).................................... 10,384,309 17.6
- ------------------------
(1) Except as otherwise indicated in the notes below, the persons indicated have
sole voting and investment power with respect to shares listed. In addition
to the specific shares indicated in the following footnotes, this column
includes shares held directly and shares subject to stock options which are
currently exercisable.
(2) These percentages are calculated assuming the conversion of all securities
convertible within 60 days into Class A Common Stock, which are held by the
executive officer or director listed above but not those held by others.
Asterisks indicate beneficial ownership of 1% or less of the class.
(3) Includes vested options to purchase 1,200,000 shares each of Class A Common
Stock and Series A Convertible Preferred Stock granted pursuant to the
Company's 1993 Stock Option/Stock Issuance Plan and which options are
subject to certain restrictions on disposition.
(4) Includes vested options to purchase 1,000,000 shares each of Class A Common
Stock and Preferred Stock granted pursuant to the Company's 1993 Stock
Option/Stock Issuance Plan and which options are subject to certain
restrictions on disposition.
(5) Includes 2,000 shares of Common Stock granted pursuant to the Company's
Restricted Stock Plan for Non-Employee Directors, and vested options to
purchase 125,000 shares each of Class A Common Stock and Preferred Stock
granted pursuant to the Company's Automatic Option Grant Program which
shares and options are subject to certain restrictions on disposition.
(6) Includes vested options to purchase 1,100,000 shares each of Class A Common
Stock and Series A Convertible Preferred Stock granted pursuant to the
Company's 1993 Stock Option/Stock Issuance Plan which options are subject to
certain restrictions on disposition.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in answer to this item appears in Note 10 to the Financial
Statements included in this Annual Report.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following financial statements and supplementary data of the Company are
included in a separate section of this Annual Report on Form 10-K commencing on
the page numbers specified below:
PAGE
----
Index to Financial Statements and Supplementary Data...................... F-1
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996........................... F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996..................................................................... F-4
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996..................................................................... F-5
Statements of Changes in Stockholders' Equity for the Three Years Ended
December 31, 1996........................................................ F-6
Notes to Financial Statements............................................. F-7
(2) Financial Statement Schedules:
All schedules have been omitted since they are not applicable, not required,
or the information is included in the financial statements or notes thereto.
(3) Listing of Exhibits:
3.01 Restated Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 3.01 to the Registrant's Annual Report on
Form 10-K for 1992.
3.02 Amended By-Laws of the Registrant, incorporated by reference to
Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for 1992.
4.01 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.01).
4.02 Amended By-Laws of the Registrant (filed as Exhibit 3.02).
4.03 Indenture dated as of July 15, 1992 for 12% Senior Subordinated
Pay-In-Kind Debentures Due March 15, 2002 ("Senior Subordinated
Debentures"), issued by the Registrant in the aggregate principal
amount of $127,550,000, incorporated by reference to Exhibit 4.08 to
the Registrant's Annual Report on Form 10-K for 1992.
4.04 Indenture dated as of July 15, 1992 for 12% Subordinated Pay-In-Kind
Debentures Due March 15, 2002, ("Subordinated Debentures"), issued by
the Registrant in the aggregate principal amount of $75,688,000,
incorporated by reference to Exhibit 4.09 to the Registrant's Annual
Report on Form 10-K for 1992.
4.05 Form of Senior Subordinated Debentures (included in Exhibit 4.03).
4.06 Form of Subordinated Debentures (included in Exhibit 4.04).
10.01 Tax Sharing Agreement dated as of December 18, 1989, between the
Registrant and The Henley Group, Inc. ("Henley Group"), incorporated
by reference to Exhibit 10.03 to the Registrant's Annual Report on
Form 10-K for 1989.
10.02 Tax Sharing Agreement dated as of December 15, 1988, between
Wheelabrator Technologies, Inc. (formerly The Wheelabrator Group,
Inc.) ("WTI") and the Registrant ("WTI Tax Sharing Agreement"),
incorporated by reference to Exhibit 10.02 to Amendment No. 3 on Form
8 to the Registrant's Registration Statement on Form 10.
10.02A Amendment No. 1 to WTI Tax Sharing Agreement dated February 14, 1994,
incorporated by reference to Exhibit 10.02A to the Registrant's
Annual Report on Form 10-K for 1993.
10.03 1993 Stock Option/Stock Issuance Plan, incorporated by reference to
Exhibit 10.03A to the Registrant's Annual Report on Form 10-K for
1993.
10.04 Deferred Compensation Plan for Non-Employee Directors of the
Registrant, incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form 10.
28
10.05 Retirement Plan for Non-Employee Directors of the Registrant,
incorporated by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form 10.
10.06 Retirement Plan of the Registrant, incorporated by reference to
Exhibit 10.16 to Amendment No. 3 on Form 8 to the Registrant's
Registration Statement on Form 10.
10.06A Amendment to Retirement Plan of the Registrant dated December 8,
1993, incorporated by reference to Exhibit 10.07A to the Registrant's
Annual Report on Form 10-K for 1993.
10.07 The Koll Company 401(k) Plus Plan and Trust Agreement dated July 1,
1989 under which the Registrant elected to participate as an employer
effective as of October 1, 1993, incorporated by reference to Exhibit
10.08 to the Registrant's Annual Report on Form 10-K for 1993.
10.08 Restated Environmental Matters Agreement dated as of July 28, 1989,
among a predecessor to the Registrant, Allied-Signal, New Hampshire
Oak, Fisher Scientific Group Inc. ("Fisher Group") and the
Registrant, incorporated by reference to Exhibit 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1989 as amended by the Assignment, Assumption and Indemnification
Agreement dated as of December 21, 1989, among the Registrant, Henley
Group, New Hampshire Oak, Fisher Group, WTI and Allied-Signal,
incorporated by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for 1989.
10.09 Environmental Expenditures Agreement dated as of July 28, 1989, among
the Registrant, WTI, New Hampshire Oak and Fisher Group, incorporated
by reference to Exhibit 10(b) to the Registrant's quarterly report on
Form 10-Q for the quarter ended June 30, 1989 as amended by
Assignment and Assumption Agreement dated as of January 1, 1990,
among the Registrant, Henley Group, New Hampshire Oak, Fisher Group,
WTI and Henley Holdings, Inc., incorporated by reference to Exhibit
10.22 to the Registrant's Annual Report on Form 10-K for 1989.
10.10 Transition Agreement dated as of July 16, 1992 ("Transition
Agreement"), among the Registrant, Henley Group and Abex Inc.,
incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for 1992.
10.10A Amendment to Transition Agreement dated April 1, 1993, incorporated
by reference to Exhibit 10.12A to the Registrant's Annual Report on
Form 10-K for 1993.
10.11 Tax Sharing Agreement dated as of June 10, 1992, between Henley Group
and Abex Inc., incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for 1992.
10.12 Conditional Guarantee dated as of July 9, 1992, among the Registrant,
Abex Inc., Henley Group and Allied-Signal, incorporated by reference
to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for
1992.
10.13 Reimbursement Agreement dated as of July 16, 1992, among the
Registrant, Henley Group and Abex Inc., incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for
1992.
10.14 Pension Agreement dated as of July 16, 1992, among the Registrant,
Henley Group and Abex Inc., incorporated by reference to Exhibit
10.18 to the Registrant's Annual Report on Form 10-K for 1992.
10.15 Stock Purchase Agreement ("Stock Agreement") dated December 17, 1993
between the Registrant, certain of its subsidiaries and Libra Invest
& Trade Ltd. ("Libra") incorporated by reference to Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for 1993.
10.15A Amendment No. 1 to the Stock Agreement dated as of February 15, 1994,
incorporated by reference to Exhibit 10.19A to the Registrant's
Annual Report on Form 10-K for 1993.
10.16 Exchange Agreement dated December 17, 1993, between the Registrant
and Libra, incorporated by reference to Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for 1993.
29
10.17 Financing and Accounting Services Agreement dated as of September 30,
1993 between the Registrant and The Koll Company, incorporated by
reference to Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for 1993.
10.18 Management Information Systems and Human Resources Services Agreement
dated as of September 30, 1993 between the Registrant and Koll
Management Services, Inc., incorporated by reference to Exhibit 10.22
to the Registrant's Annual Report on Form 10-K for 1993.
10.19 License Agreement dated September 30, 1993 between the Registrant,
The Koll Company and Mr. Donald M. Koll, incorporated by reference to
Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.20 Sublease Agreement dated September 30, 1993 between the Registrant
and the Koll Company, incorporated by reference to Exhibit 10.24 to
the Registrant's Annual Report on Form 10-K for 1993.
10.21 Netting Agreement dated as of October 1, 1993 between a subsidiary of
the Registrant and an executive officer of the Registrant, together
with a schedule identifying five (5) substantially identical
documents not filed therewith, incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994.
10.22 Agreement of Limited Partnership dated as of October 1, 1993 between
a subsidiary of the Registrant and an executive officer of the
Registrant, together with a schedule identifying five (5)
substantially identical documents not filed therewith, incorporated
by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
10.23 Agreement Respecting Vesting of Rights dated as of October 1, 1993
between a subsidiary of the Registrant and an executive officer of
the Registrant, together with a schedule identifying five (5)
substantially identical documents not filed therewith, incorporated
by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
10.24 Promissory Note Agreement dated April 29, 1995 between the Registrant
and AV Partnership, incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
10.25 Koll Asia Pacific Development Services Amended and Restated Pacific
Rim Joint Business Opportunity Agreement, dated as of May 24, 1996,
incorporated by reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
10.26 Bargain Purchase and Sale Agreement and Escrow Instructions dated as
February 14, 1997 between a subsidiary of the Registrant and the
State of California, acting by and through the State Lands
Commission.*
21.01 Subsidiaries of the Registrant.*
27.01 Financial Data Schedule.*
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K:
On November 26, 1996, the Company filed a report on Form 8-K reporting,
under Item 5 thereof, that it had been informed by the representatives of
certain holders of its outstanding senior subordinated debentures and its
subordinated debentures that they intended to support the Company's proposed
Recapitalization. The report also included a disclosure of certain confidential
financial and other information received by the representatives of the holders
of the Company's Debentures.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 20, 1997 KOLL REAL ESTATE GROUP, INC.
By: /s/__RAYMOND J. PACINI____________
Raymond J. Pacini
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------------------- --------------------
Chairman of the Board and
/s/DONALD M. KOLL Chief Executive Officer February 20, 1997
(Donald M. Koll) (Principal Executive Officer)
Executive Vice President and Chief
/s/RAYMOND J. PACINI Financial Officer (Principal Financial and February 20, 1997
(Raymond J. Pacini) Accounting Officer)
/s/RAY WIRTA Director February 20, 1997
(Ray Wirta)
/s/HAROLD A. ELLIS, JR. Director February 20, 1997
(Harold A. Ellis, Jr.)
/s/PAUL C. HEGNESS Director February 20, 1997
(Paul C. Hegness)
/s/J. THOMAS TALBOT Director February 20, 1997
(J. Thomas Talbot)
/s/MARCO F. VITULLI Director February 20, 1997
(Marco F. Vitulli)
32
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
---------
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Independent Auditor's Report............................................................................. F-2
Financial Statements..................................................................................... F-3
Notes to Financial Statements............................................................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of Koll Real Estate Group, Inc.:
We have audited the accompanying balance sheets of Koll Real Estate Group,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
cash flows and changes in stockholders' equity for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Koll Real Estate Group, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The Company carries its real estate properties at cost, net of impairment
losses. As discussed in Note 2, the estimation process is inherently uncertain
and relies to a considerable extent on future events and market conditions. As
discussed in Note 5, the development of the Company's Bolsa Chica project is
dependent upon various governmental approvals and various economic factors.
Accordingly, the amount ultimately realized from such project may differ
materially from the current estimate of fair value.
Deloitte & Touche LLP
Costa Mesa, California
February 18, 1997
F-2
KOLL REAL ESTATE GROUP, INC.
BALANCE SHEETS
1995 1996
--------- ---------
DECEMBER 31,
--------------------
(IN MILLIONS)
ASSETS
Cash and cash equivalents...................................................................... $ 4.9 $ 2.1
Restricted cash................................................................................ 2.5 .2
Real estate held for development or sale....................................................... 28.1 25.2
Operating properties, net...................................................................... 4.8 --
Land held for development...................................................................... 220.0 223.5
Other assets................................................................................... 16.9 21.2
--------- ---------
$ 277.2 $ 272.2
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities................................................... $ 4.9 $ 11.7
Senior bank debt........................................................................... 16.6 7.1
Project debt............................................................................... -- 12.5
Subordinated debentures.................................................................... 173.2 195.9
Other liabilities.......................................................................... 52.9 43.9
--------- ---------
Total liabilities........................................................................ 247.6 271.1
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Series A (convertible redeemable nonvoting) Preferred Stock--$.01 par value; 42,505,504
shares authorized; 40,290,735 and 38,886,626 shares outstanding, respectively............ .4 .4
Class A (voting) Common Stock--$.05 par value; 625,000,000 shares authorized; 47,534,472
and 48,938,543 shares outstanding, respectively.......................................... 2.4 2.4
Class B (convertible nonvoting) Common Stock--$.05 par value; 25,000,000 shares authorized
and no shares outstanding................................................................ -- --
Capital in excess of par value............................................................. 229.9 229.2
Deferred proceeds from stock issuance...................................................... (1.1) (.4)
Minimum pension liability.................................................................. (1.0) (.6)
Accumulated deficit........................................................................ (201.0) (229.9)
--------- ---------
Total stockholders' equity............................................................... 29.6 1.1
--------- ---------
$ 277.2 $ 272.2
--------- ---------
--------- ---------
See the accompanying notes to financial statements.
F-3
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE
AMOUNTS)
Revenues:
Asset sales........................................................................ $ 11.1 $ 23.5 $ 33.6
Operations......................................................................... 10.3 10.5 11.2
--------- --------- ---------
21.4 34.0 44.8
--------- --------- ---------
Costs of:
Asset sales........................................................................ 10.7 21.6 30.2
Operations......................................................................... 9.5 10.3 10.0
--------- --------- ---------
20.2 31.9 40.2
--------- --------- ---------
Gross operating margin............................................................... 1.2 2.1 4.6
General and administrative expenses.................................................. 8.7 7.7 9.6
Interest expense..................................................................... 19.4 22.6 24.9
Write-down of real estate properties................................................. -- 121.1 --
Other expense (income), net.......................................................... 2.1 3.1 (1.1)
--------- --------- ---------
Loss from continuing operations before income taxes.................................. (29.0) (152.4) (28.8)
Provision (benefit) for income taxes................................................. (10.3) (35.5) .1
--------- --------- ---------
Loss from continuing operations...................................................... (18.7) (116.9) (28.9)
Discontinued operations:
Gain on disposition, net of income taxes of $.3.................................... .7 -- --
--------- --------- ---------
Net loss............................................................................. $ (18.0) $ (116.9) $ (28.9)
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share:
Continuing operations.............................................................. $ (0.43) $ (2.48) $ (.60)
Discontinued operations............................................................ 0.02 -- --
--------- --------- ---------
Net loss per common share............................................................ $ (0.41) $ (2.48) $ (.60)
--------- --------- ---------
--------- --------- ---------
See the accompanying notes to financial statements.
F-4
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS)
Cash flows from operating activities:
Net loss........................................................................... $ (18.0) $ (116.9) $ (28.9)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization.................................................... 1.2 1.2 1.2
Non-cash interest expense........................................................ 18.0 20.5 23.2
Write-down of real estate properties............................................. -- 121.1 --
Gains on asset sales............................................................. (.4) (1.9) (3.4)
Gains on dispositions of discontinued operations................................. (.7) -- --
Proceeds from asset sales, net................................................... 10.5 22.5 31.5
Investments in real estate held for development or sale.......................... (6.1) (18.2) (20.4)
Investment in land held for development.......................................... (9.9) (7.8) (3.5)
Decrease (increase) in other assets.............................................. (.6) 11.9 (5.5)
Decrease in accounts payable, accrued and other liabilities...................... (9.7) (61.8) (2.7)
Other, net....................................................................... (.1) -- .4
--------- --------- ---------
Cash used by operating activities.............................................. (15.8) (29.4) (8.1)
--------- --------- ---------
Cash flows from investing activities:
Sale of short-term investments..................................................... 21.7 -- --
Proceeds from disposition of discontinued operation................................ 1.0 -- --
Acquisitions....................................................................... (1.2) (.3) --
--------- --------- ---------
Cash provided (used) by investing activities................................... 21.5 (.3) --
--------- --------- ---------
Cash flows from financing activities:
Borrowings of senior bank debt..................................................... -- 21.6 8.7
Repayments of senior bank debt..................................................... (7.0) (5.0) (18.2)
Borrowings of project debt......................................................... -- -- 12.5
Use of restricted cash............................................................. -- 10.0 2.3
Deposits of restricted cash........................................................ (7.5) (5.0) --
--------- --------- ---------
Cash provided (used) by financing activities................................... (14.5) 21.6 5.3
--------- --------- ---------
Net decrease in cash and cash equivalents............................................ (8.8) (8.1) (2.8)
Cash and cash equivalents--beginning of year......................................... 21.8 13.0 4.9
--------- --------- ---------
Cash and cash equivalents--end of year............................................... $ 13.0 $ 4.9 $ 2.1
--------- --------- ---------
--------- --------- ---------
See the accompanying notes to financial statements.
F-5
KOLL REAL ESTATE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
DEFERRED
CAPITAL PROCEEDS
IN EXCESS FROM MINIMUM
PREFERRED COMMON OF PAR STOCK PENSION ACCUMULATED
STOCK STOCK VALUE ISSUANCE LIABILITY DEFICIT TOTAL
-------- -------- --------- --------- --------- ------------- ------
(IN MILLIONS)
Balance January 1, 1994............ $ .4 $ 2.2 $ 230.0 $ (1.5) $ (1.5) $ (66.1) $163.5
Net Loss......................... -- -- -- -- -- (18.0) (18.0)
Minimum pension liability........ -- -- -- -- (.5) -- (.5)
Valuation adjustment to deferred
proceeds from stock issuance... -- -- .1 (.1) -- -- --
Issuance of stock related to
acquisition.................... -- .1 .4 -- -- -- .5
--- --- --------- --------- --------- ------------- ------
Balance December 31, 1994.......... .4 2.3 230.5 (1.6) (2.0) (84.1) 145.5
Net loss......................... -- -- -- -- -- (116.9) (116.9)
Minimum pension liability........ -- -- -- -- 1.0 -- 1.0
Valuation adjustment to deferred
proceeds from stock issuance... -- -- (.5) .5 -- -- --
Conversion of preferred to
common......................... -- .1 (.1) -- -- -- --
--- --- --------- --------- --------- ------------- ------
Balance December 31, 1995.......... .4 2.4 229.9 (1.1) (1.0) (201.0) 29.6
Net loss......................... -- -- -- -- -- (28.9) (28.9)
Minimum pension liability........ -- -- -- -- .4 -- .4
Valuation adjustment to deferred
proceeds from stock issuance... -- -- (.7) .7 -- -- --
--- --- --------- --------- --------- ------------- ------
Balance December 31, 1996.......... $ .4 $ 2.4 $ 229.2 $ (.4) $ (.6) $ (229.9) $ 1.1
--- --- --------- --------- --------- ------------- ------
--- --- --------- --------- --------- ------------- ------
See the accompanying notes to financial statements.
F-6
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BASIS OF PRESENTATION
The principal activities of Koll Real Estate Group, Inc. and its
consolidated subsidiaries (the "Company", formerly known as The Bolsa Chica
Company and Henley Properties Inc.) include: (i) obtaining zoning and other
entitlements for land it owns and improving the land for residential
development; (ii) single and multi-family residential construction in Southern
California; and (iii) providing commercial, industrial, retail and residential
real estate development services to third parties, including feasibility
studies, entitlement coordination, project planning, construction management,
financing, marketing, acquisition, disposition and asset management services on
a national and international basis, through its offices throughout California,
and in Dallas, Phoenix, Seattle, Shanghai, China and Taipei, Taiwan. Once the
residential land owned by the Company is entitled, the Company may sell
unimproved land to other developers or investors; sell improved land to
homebuilders; or participate in joint ventures with other developers, investors
or homebuilders to finance and construct infrastructure and homes.
On December 31, 1989, The Henley Group, Inc. separated its business into two
public companies through a distribution to its Class A and Class B common
stockholders of all of the common stock of a newly formed Delaware corporation
to which The Henley Group, Inc. had contributed its non-real estate development
operations, assets and related liabilities. The new company was named The Henley
Group, Inc. ("Henley Group") immediately following the distribution. The
remaining company was renamed Henley Properties Inc. ("Henley Properties") and
consisted of the real estate development business and assets of Henley Group,
including its subsidiary Signal Landmark.
On July 16, 1992, a subsidiary of Henley Properties merged with and into
Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of
Henley Properties. In the Merger, Henley Properties, through its Henley Group
subsidiary, received net assets having a book value as of July 16, 1992 of
approximately $45.3 million, consisting of approximately $103.6 million of
assets, including $58.3 million of cash and a 44% interest in Deltec Panamerica
S.A. ("Deltec"), and $58.3 million of liabilities. In connection with the
Merger, Henley Properties was renamed The Bolsa Chica Company.
On September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the
domestic real estate development business and related assets of The Koll
Company. In connection with this acquisition, The Bolsa Chica Company was
renamed Koll Real Estate Group, Inc.
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts have been reclassified to
conform with the current year presentation.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
REAL ESTATE
Real estate held for development and land held for development (real estate
properties) are carried at cost net of impairment losses based on undiscounted
cash flows. Real estate held for sale is carried at cost, net of impairment
losses and selling costs based on undiscounted cash flows. The estimation
process involved in the determination of fair value is inherently uncertain
since it requires estimates as to future
F-7
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
events and market conditions. Such estimation process assumes the Company's
ability to complete development and dispose of its real estate properties in the
ordinary course of business based on management's present plans and intentions.
Economic, market, environmental and political conditions may affect management's
development and marketing plans. In addition, the implementation of such
development and marketing plans could be affected by the availability of future
financing for development and construction activities. Accordingly, the ultimate
fair values of the Company's real estate properties are dependent upon future
economic and market conditions, the availability of financing, and the
resolution of political, environmental and other related issues.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of" ("SFAS 121"), which requires an impaired asset (real property or
intangible) to be written down to fair value. If an impairment occurs, the fair
value of an asset for purposes of SFAS 121 is deemed to be the amount a willing
buyer would pay a willing seller for such asset in a current transaction. As
required, the Company adopted SFAS 121 during the quarter ended March 31, 1996
which did not have any effect on its financial statements. Any potential future
revaluation of the Bolsa Chica property that could result if a recapitalization
is implemented by the Company would be based on the facts and circumstances at
that time.
The cost of sales of multi-unit projects is generally computed using the
relative sales value method, with direct construction costs and property taxes
accumulated by phase, using the specific identification method. Interest cost is
capitalized to real estate projects during their development and construction
period.
Operating properties are generally depreciated utilizing the straight-line
method over estimated lives ranging principally from 5 to 7 years. Accumulated
depreciation amounted to $1.1 million and $1.0 million at December 31, 1995 and
1996, respectively.
INTANGIBLE ASSETS
Goodwill, which represents the difference between the purchase price of a
business acquired in 1993 and the related fair value of net assets acquired, is
amortized on a straight-line basis over 15 years. Goodwill of $7.9 million and
$7.3 million as of December 31, 1995, and 1996, respectively, is included in
other assets. The carrying value of goodwill is reviewed periodically based on
projected cash flows to be received from related operations over the remaining
amortization period of the goodwill. If such projected cash flows were less than
the carrying value of the goodwill, the difference would be charged to
operations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company accounted for the cost of post-retirement benefits other than
pensions, which are primarily health care related, during each employee's active
working career under a plan which was frozen in 1993. As of December 31, 1995,
and 1996, the accrued unfunded costs totaled $1.3 million and $.9 million,
respectively.
INCOME TAXES
The Company accounts for income taxes on the liability method. Deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect in the years in which these differences are expected to reverse.
F-8
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUES
Sales are recorded using the full accrual method when title to the real
estate sold is passed to the buyer and the buyer has made an adequate financial
commitment. When it is determined that the earning process is not complete,
income is deferred using the installment, cost recovery or percentage of
completion methods of accounting.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which required the Company to adopt disclosure
provisions for stock-based compensation effective January 1, 1996. The standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation is measured at the grant
date based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. This standard encourages rather
than requires adoption of the fair value method of accounting for employee
stock-based transactions. Companies are permitted to continue to account for
such transactions under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," but will be required to disclose in
a note to the financial statements pro forma net income and net income per share
as if the new method of accounting had been applied. The Company has elected to
continue to apply APB Opinion No. 25 in its financial statements and no pro
forma disclosure was required as of and for the year ended December 31, 1996.
EARNINGS PER COMMON SHARE
The weighted average numbers of common shares outstanding for the years
ended December 31, 1994, 1995 and 1996 were 43.8 million, 47.1 million, and 48.3
million, respectively. The Series A Preferred Stock, as well as outstanding
stock options are not included in the loss per share calculation for each year
because the effect is antidilutive. The earnings per share calculations include
the effect of 2.0 million shares of Class A Common Stock issued on November 9,
1994, in connection with the acquisition of the Kathryn G. Thompson Company
(Note 3). The 1994, 1995 and 1996 earnings per share calculations reflect the
conversion of 1.2 million shares, an additional 1.0 million shares, and an
additional 1.4 million shares, respectively, of Series A Preferred Stock to an
equal number of shares of Class A Common Stock.
NOTE 3--ACQUISITIONS AND DISPOSITIONS
In November 1994, the Company acquired the stock of Kathryn G. Thompson
Company ("KGTC") and related assets. The principal activities of the acquired
business are residential real estate development and homebuilding, focusing on
the entry-level and first time move-up market segments. The principal project of
the acquired business is a 49% general partnership interest in a 230-acre
project planned for approximately 1,200 residential units in Aliso Viejo in
southern Orange County ("AV Partnership"). In connection with the acquisition,
the Company paid $1.2 million in cash and a $.5 million note, issued 2 million
shares of Class A Common Stock and warrants to purchase an additional 2 million
shares. The Company guaranteed approximately $4.8 million of capital
contribution notes related to the Aliso Viejo partnership interest, which notes
are primarily payable out of positive net cash flow to be generated by the
partnership interest and are not due until the earlier of the completion of the
project or April 1999. In addition, in November 1994, Ms. Kathryn G. Thompson,
who was appointed as a director of the Company,
F-9
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS AND DISPOSITIONS (CONTINUED)
entered into a covenant not to compete with the Company with respect to real
estate development, subject to certain limited exceptions. Ms. Thompson resigned
as an officer and director of the Company effective November 1, 1996. In
conjunction with her resignation, the covenant of Ms. Thompson was released.
Summarized financial information of AV Partnership is presented below at
December 31, 1995 and 1996 and for the years then ended (in millions):
1995 1996
----------- -----------
Balance Sheet Data:
Total assets........................................................ $ 111.9 $ 102.5
Total project debt and other liabilities............................ 107.9 110.5
----------- -----------
Partners' capital................................................... $ 4.0 $ (8.0)
----------- -----------
----------- -----------
Statement of Operations Data:
Revenues............................................................ $ -- $ 44.3
Expenses............................................................ (4.1) (55.3)
----------- -----------
Net loss............................................................ $ (4.1) $ (11.0)
----------- -----------
----------- -----------
The Company uses the equity method to account for its investment in AV
Partnership and accordingly, the statement of operations includes a $.1 million
loss for the period from the acquisition date through December 31, 1994, and
losses of $2.0 million and $1.2 million, respectively, for the years ended
December 31, 1995 and 1996. Due to a significant shortfall in sales during 1995
versus forecast, the financial structure of the partnership and the significant
amount of participating mortgages with preference to the Company's equity
interest, the Company does not expect to receive a financial return from this
partnership and in 1995 reserved for its guaranty of $4.8 million of capital
contribution notes. The liability relating to the guaranteed capital
contribution notes, including accrued interest, for this partnership of $4.8
million and $6.0 million at December 31, 1995 and 1996, respectively, are
included in other liabilities.
In December 1993, the Company completed a transaction with Libra whereby it
exchanged the Company's Lake Superior Land Company subsidiary for approximately
$42.4 million in aggregate face amount of Senior Subordinated Debentures held by
Libra, and net cash proceeds to be generated by Libra's periodic sale of up to
approximately 3.4 million shares of the Company's Class A Common Stock held by
Libra through a series of transactions to be effected in an orderly manner. The
Company also completed a separate transaction with Libra in December 1993,
whereby the Company exchanged approximately 3.4 million newly issued shares of
its Class A Common Stock for approximately $10.6 million in aggregate face
amount of Subordinated Debentures held by Libra. The shares issued to Libra were
deposited in a custodial account for periodic sale in accordance with
instructions from the Company. In February 1994, the Company received $1 million
in cash from Libra in exchange for the immediate termination of a contingent
payment provision of the December 1993 transaction with Libra.
F-10
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Real estate held for development or sale consists of the following at
December 31 (in millions):
1995 1996
--------- ---------
Residential.................................................................. $ 26.3 $ 12.4
Commercial/industrial........................................................ 1.8 12.8
--------- ---------
$ 28.1 $ 25.2
--------- ---------
--------- ---------
NOTE 5--LAND HELD FOR DEVELOPMENT
Following completion of the Company's sale of approximately 880 lowland
acres of its Bolsa Chica property to the State of California on February 14,
1997 as described below, land held for development consists of approximately 310
acres located in Orange County, California, adjacent to the Pacific Ocean,
surrounded by the City of Huntington Beach and approximately 35 miles south of
downtown Los Angeles ("Bolsa Chica").
The planned community at Bolsa Chica is expected to offer a broad mix of
home choices, including single-family homes, townhomes and condominiums at a
wide range of prices. In December 1994, the Orange County Board of Supervisors
unanimously approved a Local Coastal Program ("LCP") for up to 3,300 units of
residential development and a wetlands restoration plan for this property. The
3,300-unit LCP provides for development of up to 2,500 homes on the mesa (high
ground) portion of the property and up to 900 homes on the lowland portion of
the property, not to exceed 3,300 homes in the aggregate. The related
Development Agreement was unanimously approved by the Orange County Board of
Supervisors in April 1995. The California Coastal Commission approved the LCP in
January 1996 subject to suggested modifications. These suggested modifications
were approved by the Orange County Board of Supervisors in June 1996, and on
July 11, 1996 the California Coastal Commission certified the LCP for the
Company's Bolsa Chica property.
On February 14, 1997, the Company completed the sale of approximately 880
lowland acres owned by the Company at Bolsa Chica to the California State Lands
Commission for $25 million and will, therefore, forego opportunities to develop
900 homes in the lowland. Under an interagency agreement among various state and
federal agencies, these agencies have agreed to restore the Bolsa Chica lowlands
utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A reserve
of $1.5 million has been included in other liabilities as of December 31, 1996,
with respect to potential costs payable by the Company under agreements
negotiated with the State Lands Commission and certain oil field operators
regarding environmental clean-up at the Bolsa Chica lowlands. In connection with
the lowlands sale, the Company paid $833,333 of these costs at closing, leaving
a reserve balance of $700,000 on its financial statements for potential
additional clean-up costs.
The Company is now pursuing the secondary permitting process for the mesa
through the County of Orange in order to implement the approved development plan
for up to 2,500 homes. This process is currently expected to be completed in the
fourth quarter of 1997. The Company expects, subject to its ability to obtain
financing on a commercially reasonable and timely basis, and subject to
obtaining the secondary permits, to commence infrastructure construction on the
mesa in the fourth quarter of 1997. However, due to certain factors beyond the
Company's control, including possible objections of various environmental and
so-called public interest groups that may be made in legislative, administrative
or judicial forums, the start of construction could be delayed. In this regard,
on January 13, 1995, two lawsuits
F-11
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LAND HELD FOR DEVELOPMENT (CONTINUED)
challenging the Orange County Board of Supervisors' approval of the Bolsa Chica
project were filed in Orange County Superior Court (the "Court"). Although the
lawsuits differed in the particular issues they raised, generally they each
alleged, among other things, violations of the California Environmental Quality
Act and violations of the California Government Code planning and zoning laws.
One lawsuit, which was brought by the school districts, has been settled with an
agreement regarding school fees to be paid to the plaintiff districts. In the
other "environmental lawsuit", the plaintiffs did not seek monetary damages, but
instead asked the Court to set aside the approval of the Bolsa Chica project. In
February 1996, the Court ruled on the "environmental lawsuit", rejecting all but
one of the arguments, and requiring an additional 45-day public review and
comment period regarding the tidal inlet portion of the wetlands restoration
plan, which was completed in the second quarter of 1996. The County reapproved
the plan without change in June 1996. On January 24, 1997 this lawsuit was
dismissed by the Court. In filing the judgement, the Court ruled that the County
had fulfilled all requirements for approval of the Bolsa Chica development
plans, without the Court requiring any change to the plans.
In addition, on March 6, 1996 and March 11, 1996 two lawsuits were filed
against the Coastal Commission, the Company and other Bolsa Chica landowners as
real parties in interest, alleging that the Coastal Commission's approval of the
LCP is not in compliance with the Coastal Act and other statutory requirements.
These lawsuits seek to set aside the approval of the Bolsa Chica project, and
are currently scheduled to be tried in April 1997. Given the recent sale of the
Bolsa Chica lowlands described above, the primary issues which were the subject
of this litigation have been eliminated. Furthermore, the plaintiffs in one of
these lawsuits have informed the Company that given the sale of the lowlands,
they will work with the Company in an effort to resolve the remaining issues of
their lawsuit. The Company believes that the remaining litigation issues which
challenge development of the Bolsa Chica mesa are without merit. Furthermore,
the Company does not believe that these lawsuits will be successful in
permanently preventing the Company from completing the Bolsa Chica project,
however, there can be no assurance in this regard or that these suits will not
result in delays.
In 1995, in accordance with Statement of Financial Accounting Standard No.
67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects"
("SFAS 67"), the Company carried real estate properties, including Bolsa Chica,
at the lower of cost or net realizable value, with net realizable value defined
as the undiscounted estimated future cash flows from the project. As of December
31, 1995, the Company's review of the current estimated cash flows for Bolsa
Chica indicated that a reserve of approximately $113.6 million was required to
adjust the carrying value of Bolsa Chica to its then estimated net realizable
value of $220 million pursuant to SFAS 67. The valuation reserve primarily
reflects management's decision in the fourth quarter of 1995 (following the
approval of additional funding by the Ports) to make completing the sale of the
lowlands to a government agency a strategic goal of the Company, along with
updated estimates of future cash flows for the mesa portion of the project
reflecting recent market conditions. During 1995, the Southern California
residential real estate market continued to decline, affecting estimated sale
pricing, housing mix and number of units planned. The Company's decision in 1995
to pursue a sale of the lowlands was expected to, and subsequently has, resulted
in the elimination of up to 900 units previously planned in the lowlands, which,
in turn, resulted in a significant reduction as of December 31, 1995 in
projected future cash flows previously anticipated from the Bolsa Chica project.
Realization of the Company's investment in Bolsa Chica will also depend upon
various economic factors, including the demand for residential housing in the
Southern California market and the availability of credit to the Company and to
the housing industry.
F-12
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT
SENIOR BANK DEBT
In December 1994, the Company entered into a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation ("Nomura") to fund
payment of the settlement of the Abex litigation in excess of $7.5 million to be
funded by the Company. In February 1995, the Company paid an aggregate of $22
million to settle the litigation, of which $15.5 million was funded by
borrowings under the letter of credit and reimbursement agreement and the
balance of $6.5 million from restricted cash. Since this financing agreement was
solely for the purpose described above, no additional funds are available under
this facility. The Company repaid $8.4 million of such borrowings during 1996.
In December 1994, the Company also entered into a construction loan agreement
with Nomura to partially fund infrastructure construction at Rancho San Pasqual,
the Company's golf/residential property in San Diego County. The Company
borrowed $1.3 million and $8.7 million during 1995 and 1996, respectively, under
this loan agreement. As required under the construction loan agreement, the
Company deposited $5 million into an escrow account in January 1995 to be used
solely for the funding of infrastructure construction costs at Rancho San
Pasqual, of which $2.5 million was included in restricted cash on December 31,
1995. The Company repaid $.2 million and $9.8 million of borrowings under the
construction loan agreement during 1995 and 1996, respectively.
The remaining borrowings outstanding as of December 31, 1996 under the
letter of credit and reimbursement agreement were principally secured by a deed
of trust on Rancho San Pasqual and a pledge and security interest in the
Company's interest in Fairbanks Highlands, LLC, a joint venture with Taylor
Woodrow Homes, Inc. formed on December 6, 1996, along with a pledge of the stock
of Signal Bolsa Corporation. Amounts outstanding under the letter of credit and
reimbursement agreement bear interest at 30 Day LIBOR plus 4%, which was 9.69%
as of December 31, 1996. The agreements initially required principal prepayments
equal to 80% of the net proceeds from any sales at Rancho San Pasqual, Fairbanks
Highlands, and principal prepayments equal to 50% of the net proceeds from
Rancho San Pasqual assessment district reimbursements. After March 12, 1996, the
agreements require principal repayments equal to 90% of the net proceeds from
any sales at Rancho San Pasqual, Fairbanks Highlands and Bolsa Chica. The
agreements contain certain restrictive covenants that limit, among other things,
(i) the incurrence of indebtedness, (ii) the making of investments and (iii) the
creation or incurrence of liens on existing and future assets of the Company.
The agreements also contain various financial covenants and events of default
customary for such agreements. In December 1996, the Company exercised its
option to extend the initial maturity date under the loans from December 20,
1996 to December 22, 1997. On February 18, 1997 the outstanding Nomura loan
balance was fully repaid with a portion of the proceeds from the sale of the
Bolsa Chica lowlands and the loan agreements were terminated.
In December 1994, the Company entered into a $6.5 million construction loan
agreement with the Bank of Boston, principally secured by resort and residential
property in New Hampshire ("Wentworth"). The Company borrowed $4.8 million under
this loan agreement and applied $4.2 million in proceeds from sales of
residential homes from Wentworth to satisfy required prepayments, resulting in
an outstanding balance of $.6 million on November 2, 1995, when the Company sold
all of its interest in the Wentworth residential land to its development manager
for $4.1 million in cash plus the buyer's prepayment of the outstanding balance
under the Bank of Boston credit agreement, which terminated this credit
facility.
F-13
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT (CONTINUED)
PROJECT DEBT
During 1996, the Company entered into several contracts to develop and
construct commercial properties on a build-to-suit basis. Subsidiaries of the
Company have entered into three construction loan agreements aggregating $31.9
million, which have been guaranteed by the parent, to finance these projects. As
of December 31, 1996, a total of $12.5 million was drawn and $19.4 million was
available under these construction loan agreements. The loans bear interest at
prime plus .75% or 30-day LIBOR +2% and have maturity dates between June and
August 1997.
In addition, as of December 31, 1996, one development project is owned by an
unconsolidated partnership in which a subsidiary of the Company is the general
partner. The partnership has entered into a construction loan agreement for $3.5
million, which has also been guaranteed by the parent. Under this construction
loan agreement, $1.3 million was drawn and $2.2 million was available as of
December 31, 1996.
SUBORDINATED DEBENTURES
Immediately prior to the July 1992 Merger, Henley Group distributed to its
stockholders among other consideration (the "Distribution"), in respect of each
share of its outstanding common stock (the "Henley Group Common Stock"): (i)
$6.00 aggregate principal amount of the Company's 12% Senior Subordinated
Pay-In-Kind Debentures due March 15, 2002 (the "Senior Subordinated
Debentures"); and (ii) $1.50 aggregate principal amount of the 12% Subordinated
Pay-In-Kind Debentures due March 15, 2002 (the "Subordinated Debentures", and
together with the Senior Subordinated Debentures, the "Debentures").
Approximately $159.4 million aggregate principal amount of the Debentures were
distributed in the Distribution and approximately $43.8 million aggregate
principal amount of the Debentures were retained by the Company's Henley Group
subsidiary in the Merger.
The Debentures were comprised of the following as of December 31 (in
millions):
1995 1996
--------- ---------
Senior Subordinated Debentures............................................. $ 138.2 $ 155.3
Subordinated Debentures.................................................... 34.6 38.8
--------- ---------
Total face amount........................................................ 172.8 194.1
Less unamortized discount.................................................. (5.6) (5.0)
Plus accrued interest...................................................... 6.0 6.8
--------- ---------
$ 173.2 $ 195.9
--------- ---------
--------- ---------
The Debentures give the Company the right to pay interest in-kind, in cash
or, subject to certain conditions, in the Company's common stock. It is
currently anticipated that interest on the Debentures will be paid in-kind. The
Debentures, which are due March 15, 2002, do not require any sinking fund
payments and may be redeemed by the Company at any time in cash only, or at
maturity in cash or stock, subject to certain conditions. The Debentures
prohibit the payment of any dividends or other distributions on the Company's
equity securities.
In November 1996, representatives of certain holders of the Debentures
indicated to the Company that they intend to support a de-leveraging of the
Company's capital structure through a voluntary exchange of the Debentures for
equity (the "Exchange Offer"). Under the proposed Exchange Offer,
F-14
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT (CONTINUED)
Senior-Subordinated holders and Subordinated holders would, subject to the
successful completion of the Exchange Offer, receive 56 shares and 28 shares,
respectively, (after consolidation of the preferred and common stock and the
proposed reverse split discussed below) for each $1,000 of principal amount
outstanding as of March 15, 1997, after taking into account the next scheduled
"in-kind" interest payment. The solicitation of Debentureholders, as well as
stockholder approval, will not commence until the Securities and Exchange
Commission ("SEC") completes its review of a registration statement to be filed
by the Company with the SEC in February 1997, and the entire
solicitation/exchange offer process is not expected to be completed prior to
June 1997.
A 100% acceptance rate for the Exchange Offer would result in 90% of the
Company's equity, in the form of newly issued shares of common stock, being held
by the Debentureholders (approximately 80% by Senior-Subordinated and 10% by
Subordinated). The remaining 10% of the Company's equity would be owned, in the
aggregate, by current preferred and common stockholders (approximately 5.8% by
preferred stockholders and 4.2% by common stockholders). A condition to closing
the Exchange Offer will be that a minimum of 90% of the of the face amount
outstanding of the Debentures are tendered to the Company. The Company expects
to solicit the consent of its common and preferred stockholders to the Exchange
Offer and to the consolidation of the preferred and common stock into a single
class of common stock, through the issuance of 1.75 shares of Common Stock for
each outstanding share of Preferred Stock. In addition, all stockholders will be
asked to approve a one for one hundred (1:100) reverse stock split, and the
common stockholders will be asked to elect six new directors who have been
nominated by a committee of the Debentureholders and to elect four of the
Company's existing directors to be nominated by the Company.
At December 31, 1996 the estimated aggregate fair value of the Company's
Debentures was within a range of approximately $105 million to $115 million
based on quotes from certain bond traders making a market in the Debentures.
However, due to the low trading volume and illiquid market for the Debentures,
such quotes may not be meaningful indications of value. The carrying amount for
all other debt of the Company approximates market primarily as a result of
floating interest rates.
INTEREST
The Company made cash payments for interest on senior bank debt of $1.4
million, $1.4 million and $1.5 million for the years ended December 31, 1994,
1995 and 1996, respectively.
NOTE 7--OTHER LIABILITIES
Other liabilities were comprised of the following as of December 31 (in
millions):
1995 1996
--------- ---------
Net deferred tax liabilities (Note 8)........................................ $ 10.0 $ 10.0
Other tax liabilities (Note 8)............................................... 4.5 4.5
Accrued pensions and benefits................................................ 10.7 5.6
Guaranty of capital contribution notes....................................... 4.8 6.0
Accrued indemnity obligations................................................ 18.7 17.8
Majority interest and other liabilities of consolidated partnership.......... 4.2 --
--------- ---------
$ 52.9 $ 43.9
--------- ---------
--------- ---------
F-15
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--OTHER LIABILITIES (CONTINUED)
During 1996, the Company terminated certain group annuity contracts for the
pension plan of a discontinued operation, and experienced favorable investment
returns on pension assets, resulting in a significant decrease in accrued
pensions and benefits.
NOTE 8--INCOME TAXES
The tax effects of items that gave rise to significant portions of the
deferred tax accounts are as follows for the years ended December 31 (in
millions):
1995 1996
--------- ---------
Deferred tax assets:
Real estate held for development or sale and operating properties
(due to asset revaluations and interest capitalized for tax
purposes).......................................................... $ 33.4 $ 13.8
Accruals not deductible until paid................................... 6.6 6.1
Net operating loss carryforwards..................................... 64.7 94.1
Other................................................................ 1.7 .4
Valuation allowance.................................................. (59.2) (71.3)
--------- ---------
$ 47.2 $ 43.1
--------- ---------
--------- ---------
Deferred tax liabilities:
Land held for development, (principally due to accounting for a prior
business combination, partially offset by the asset revaluation in
1995)................................................................ $ 55.0 $ 51.2
Other................................................................ 2.2 1.9
--------- ---------
$ 57.2 $ 53.1
--------- ---------
--------- ---------
Net deferred tax liabilities at December 31, 1996 are comprised entirely of
state net deferred tax liabilities.
At December 31, 1996, the Company had available tax net operating loss
carryforwards of approximately $282 million which expire in the years 2004
through 2011 if not utilized. The Internal Revenue Code (the "Code") imposes an
annual limitation on the use of loss carryforwards upon the occurrence of an
"ownership change" (as defined in Section 382 of the Code). Such an ownership
change occurred in connection with the Merger in 1992. As a result,
approximately $23 million of the Company's net operating loss carryforwards will
generally be limited to the extent that Henley Properties and its subsidiaries
recognize certain gains in the five-year period following the ownership change
which ends July 16, 1997. Additionally, the use of the Company's net operating
loss carryforwards will be further limited if the Exchange Offer is completed.
F-16
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
The following is a summary of the income tax provision (benefit) applicable
to losses from continuing operations for the years ended December 31 (in
millions):
1994 1995 1996
------ ------ ------
Income Tax Provision (Benefit):
Current................................................... $ (.3) $(10.1) $ .1
Deferred.................................................. (10.0) (25.4) --
------ ------ ------
$(10.3) $(35.5) $ .1
------ ------ ------
------ ------ ------
Cash payments for federal, state and local income taxes were approximately
$.6 million, $.3 million and $.2 million for the years ended December 31, 1994,
1995 and 1996, respectively. Tax refunds received for the years ended December
31, 1994, 1995 and 1996 were approximately $.8 million, $.4 million and $.2
million, respectively.
The principal items accounting for the difference in taxes on income
computed at the statutory rate and as recorded are as follows for the years
ended December 31 (in millions):
1994 1995 1996
--------- --------- ---------
Benefit for income taxes at statutory rate........................ $ (10.2) $ (53.3) $ (10.1)
State income taxes, net........................................... (.1) .6 (.1)
Increase in valuation allowance................................... -- 28.3 12.1
Reduction in other tax liabilities................................ -- (10.0) --
All other items, net.............................................. -- (1.1) (1.8)
--------- --------- ---------
$ (10.3) $ (35.5) $ .1
--------- --------- ---------
--------- --------- ---------
TAX SHARING AGREEMENTS
Henley Group and Abex, a former subsidiary of Henley Group whose stock was
distributed to stockholders of Henley Group in July 1992, entered into a tax
sharing agreement in 1992 prior to the Distribution to provide for the payment
of taxes for periods during which Henley Group and Abex were included in the
same consolidated group for federal income tax purposes, the allocation of
responsibility for the filing of tax returns, the cooperation of the parties in
realizing certain tax benefits, the conduct of tax audits and various related
matters.
1989-1992 INCOME TAXES. The Company is generally charged with
responsibility for all of its federal, state, local or foreign income taxes for
this period and, pursuant to the tax sharing agreement with Abex, all such taxes
attributable to Henley Group and their consolidated subsidiaries, including any
additional liability resulting from adjustments on audit (and any interest or
penalties payable with respect thereto), except that Abex is generally charged
with responsibility for all such taxes attributable to it and its subsidiaries
for 1990-1992. In addition, under a separate tax sharing agreement between
Henley Group and a former subsidiary of Henley Group, Fisher Scientific
International Inc. ("Fisher"), Fisher is generally charged with responsibility
for its own income tax liabilities for this period.
The Internal Revenue Service ("IRS") has completed its examinations of the
tax returns of the Company and its consolidated subsidiaries, including formerly
affiliated entities, for the years ended December 31, 1989, 1990 and 1991. With
respect to each examination, the IRS has proposed material audit
F-17
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
adjustments. The Company disagrees with the positions taken by the IRS and has
filed a protest with the IRS to vigorously contest the proposed adjustments.
After review of the IRS's proposed adjustments, the Company estimates that, if
upheld, the adjustments could result in Federal tax liability, before interest,
of approximately $17 million (net of amounts which may be payable by former
affiliates pursuant to tax sharing agreements). The IRS proposed adjustments, if
upheld, could also result in a disallowance of up to $147 million of available
net operating loss carryforwards, of which none are recognized, after
consideration of the valuation allowance, as of December 31, 1996. The Company
has not determined the extent of potential accompanying state tax liability
adjustments should the proposed IRS adjustments be upheld. The Company's protest
was filed in August 1995 and is still being considered by the IRS Appeals
Division. Management currently believes that the IRS's positions will not
ultimately result in any material adjustments to the Company's financial
statements. The Company is prepared to pursue all available administrative and
judicial appeal procedures with regard to this matter and the Company is advised
that its dispute with the IRS could take up to five years to resolve.
PRE-1989 INCOME TAXES. Under tax sharing agreements with WTI and Abex, the
parties are charged with sharing responsibility for paying any increase in the
federal, state or local income tax liabilities (including any interest or
penalties payable with respect thereto) for any consolidated, combined or
unitary tax group which included WTI, Henley Group or any of their subsidiaries
for tax periods ending on or before December 31, 1988. Under the agreements, the
Company was charged with the responsibility for paying $25 million, plus amounts
payable with respect to liabilities which are attributable to certain of the
Company's subsidiaries. The Company's $25 million limitation amount was accrued
in the Company's financial statements in December 1989, and following payments
made in the first quarter of 1993, $22 million remained as of December 31, 1994.
In January 1993, the IRS completed its examination of the Federal tax returns of
WTI for the periods May 1986 through December 1988 and asserted a material
deficiency relating to the tax basis of a former subsidiary of WTI. WTI, Abex
and the Company disagreed with the position taken by the IRS and WTI filed a
petition with the U.S. Tax Court. In March 1994, prior to the June 1994 trial
date, WTI and the IRS entered into a Stipulation of Settlement that resulted in
a tax payable together with interest of approximately $72 million.
In April 1994, the Company contested the alleged obligation and asserted
various defenses to making any payment under these agreements and Abex and WTI
filed suit in Delaware Chancery Court ("the Court") against the Company seeking,
among other things, declaratory relief, specific performance, and monetary
damages for the Company's alleged failure to pay approximately $21 million
claimed to be owed pursuant to tax sharing agreements entered into in 1988 and
1989, plus pre-judgment interest and attorneys' fees. The Company vigorously
defended its position with respect to the nonpayment of the alleged tax sharing
obligation, filing suit in the Supreme Court of the state of New York against
WTI and Abex. In December 1994, the Court decided against the Company, prompting
the Company to file an appeal in January 1995. In February 1995, the Company
entered into an agreement with WTI and Abex to settle both state actions in
order to avoid the ongoing cost of litigation. Under the terms of the
settlement, the Company paid an aggregate of $22 million, of which $15.5 million
was funded by borrowings under a financing agreement with a major financial
institution (Note 6) and $6.5 million was funded by the Company's restricted
cash. The Company also settled other disputes with Abex as described in Note 9.
F-18
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES
Pursuant to a 1992 transition agreement, amended in March 1993, each of Abex
and the Company provided to the other certain administrative support services
until March 31, 1994. The amendment provided for the Company to pay $.5 million
quarterly for such services and for the termination of the New Hampshire
facilities lease on March 31, 1993. Accordingly, the Company reimbursed Abex
approximately $1.8 million for the year ended December 31, 1993. Fees accrued
but not paid in the fourth quarter of 1993 and the first quarter of 1994
totaling $1.0 million were waived by Abex in connection with the February 1995
settlement with Abex described in Note 8.
LEGAL PROCEEDINGS
See Note 5 for a discussion of certain litigation relating to the Orange
County Board of Supervisors' and California Coastal Commission's approvals of
the Bolsa Chica project.
There are various other lawsuits and claims pending against the Company and
certain subsidiaries. In the opinion of the Company's management, ultimate
liability, if any, will not have a material adverse effect on the Company's
financial condition or results of operations.
CORPORATE INDEMNIFICATION MATTERS
The Company and its predecessors have, through a variety of transactions
effected since 1986, disposed of several assets and businesses, many of which
are unrelated to the Company's current operations. By operation of law or
contractual indemnity provisions, the Company has retained liabilities relating
to certain of these assets and businesses. Many of such liabilities are
supported by insurance or by indemnities from certain of the Company's
predecessor and currently or previously affiliated companies. The Company
believes its balance sheet reflects adequate reserves for these matters.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of Allied Signal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However, Allied
Signal has, through UOP, asserted a contractual indemnification claim against
the Company for all claims that may be asserted against UOP by EPA or other
parties with respect to the site. EPA has proposed a clean-up plan which would
involve covering certain real property both contiguous and non-contiguous to
Torch Lake with soil and vegetation in order to address alleged risks posed by
copper tailings and slag at an estimated cost of $6.2 million. EPA estimates
that it has spent approximately $3.9 million to date in performing studies of
the site. Under CERCLA, EPA could assert claims against the Torch Lake PRPs,
including UOP, to recover the cost of these studies, the cost of all remedial
action required at the site, and natural resources damages. In June 1995, EPA
proposed a CERCLA settlement pursuant to which UOP pay approximately between
$2.6 and $3.3 million in exchange for a limited covenant by EPA not to sue UOP
in the future. The Company, without admission of any obligation to UOP, has
determined to vigorously defend UOP's position that the EPA's proposed cleanup
plan is unnecessary and inconsistent with the requirements of CERCLA given that
the EPA's own Site Assessment and Record of Decision found no immediate threat
to human health. In the Company's view the proposed remediation costs would be
in excess of any resulting benefits.
F-19
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED PARTY TRANSACTIONS
CONSTRUCTION MANAGEMENT AGREEMENTS
In 1993, the Company entered into a construction management agreement with
Koll Construction, a wholly owned subsidiary of The Koll Company, for demolition
of bunkers at Bolsa Chica. In 1995, the Company also entered into a construction
management agreement with Koll Construction for infrastructure construction at
Rancho San Pasqual. In 1996, the Company entered into a general contractor
agreement with Koll Construction in conjunction with a build-to-suit project for
a third-party corporate office building in Nevada. During 1994, 1995 and 1996
the Company incurred fees aggregating approximately $100 thousand, $500 thousand
and $1.7 million, respectively, to Koll Construction in consideration for these
services and related reimbursements.
SERVICE AGREEMENTS
In September 1993, the Company entered into a Financing and Accounting
Services Agreement to provide The Koll Company with financing, accounting,
billing, collections and other related services until 30 days' prior written
notice of termination is given by one company to the other. Fees earned for the
years ended December 31, 1994, 1995 and 1996 were approximately $400 thousand,
$100 thousand and $100 thousand, respectively.
The Company also entered into a Management Information Systems and Human
Resources Services Agreement in September 1993 with Koll Management Services,
Inc., also known as Koll Real Estate Services ("KRES"), a company approximately
14% owned by a subsidiary of The Koll Company. Under this agreement, KRES
provides computer programming, data organization and retention, record keeping,
payroll and other related services until 30 days' prior written notice of
termination is given by one company to the other. Fees and related
reimbursements incurred were approximately $200 thousand for each of the years
ended December 31, 1994, 1995 and 1996.
SUBLEASE AGREEMENTS
In September 1993, the Company entered into an annual Sublease Agreement
with The Koll Company to sublease a portion of The Koll Company affiliate's
office building located in Newport Beach, California. The Company also entered
into lease agreements on a month-to-month basis, which were terminated in 1996,
for office space in Northern California and San Diego, California with KRES.
Combined lease costs on these leases were approximately $400 thousand for each
of the years ended December 31, 1994, 1995, and 1996, respectively.
DEVELOPMENT FEES
For the years ended December 31, 1994, 1995, and 1996 the Company earned
fees of approximately $3.5 million, $2.7 million, and $1.9 million respectively,
for real estate development and disposition services provided to partnerships in
which The Koll Company and certain directors and officers of the Company have an
ownership interest. In addition, the Company paid approximately $300 thousand
to, and received $100 thousand from Koll Construction for services provided to
each other in conjunction with two separate development service transactions for
the year ended December 31, 1994. The Company paid $100 thousand and $400
thousand to Koll Construction for construction services in the years ended
December 31, 1995 and 1996, respectively.
F-20
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED)
JOINT BUSINESS OPPORTUNITY AGREEMENT
The Company and The Koll Company entered into an agreement to jointly
develop business opportunities in the Pacific Rim effective February 1, 1994.
Effective February 1, 1995 The Koll Company assigned its interests under this
agreement to KRES. Under the terms of the agreement, the Company and KRES share
on a 50%-50% basis all costs and expenses incurred in connection with
identifying and obtaining business opportunities and will share in all revenues
generated from any such opportunities on a 50%-50% basis. The Company's share of
net loss was approximately $200 thousand, $300 thousand and $100 thousand for
the years ended December 31, 1994, 1995 and 1996, respectively. Service
contracts entered into under this agreement in 1995 included construction
services from Koll Construction, for which the venture paid approximately $100
thousand to Koll Construction for services rendered for each of the years ended
December 31, 1995 and 1996. In February 1997, KRES notified the Company that it
plans to terminate the venture effective March 5, 1997, and its interest will be
adjusted accordingly.
In March 1995, the Company and The Koll Company entered into an agreement to
jointly develop commercial development business opportunities in Mexico. Under
the terms of the agreement, the Company and The Koll Company share on a 50%-50%
basis all costs and expenses incurred in connection with identifying and
obtaining business opportunities and will share in all revenues generated from
such opportunities on a 50%-50% basis. The Company's share of such net costs and
expenses was approximately $300 thousand and $100 thousand for the ten months
ended December 31, 1995, and for year ended December 31, 1996, respectively.
During the first quarter of 1996, the Company determined that, given current
economic conditions in Mexico, it could more efficiently service opportunities
in Mexico from its offices in California and Dallas and closed its Mexico City
office. The Koll Company informed the Company that effective March 1, 1996 it
would no longer fund costs and expenses related to the pursuit of commercial
development opportunities in Mexico, and The Koll's Company interest was diluted
accordingly.
Effective April 1, 1994, the Company and KRES entered into an agreement to
combine operations in the Northwest Region in order to become a full service
real estate company in that region. This agreement was terminated effective June
30, 1996. Operating profits and losses were split on a 50%-50% basis at the end
of each calendar year or portion thereof. The Company's share of profits was
approximately $500 thousand, $600 thousand and $200 thousand for the nine months
ended December 31, 1994, the year ended December 31, 1995, and the six months
ended June 30, 1996, respectively.
STOCK PLEDGE BY DIRECTOR
In December of 1995, the Company accepted pledges of all of the common stock
and warrants convertible into the common stock of the Company owned by Ms.
Kathryn G. Thompson as security against any potential construction liability
which could be asserted against the Company as a result of the 1994 acquisition
by the Company of KGTC and in exchange for the Company releasing Ms. Thompson
from a covenant to maintain insurance with respect to such potential liability.
Ms. Thompson resigned as a director of the Company and as an officer of certain
wholly-owned subsidiaries of the Company effective November 1, 1996. Ms.
Thompson received compensation of $300,000 during each of the years ended
December 31, 1995 and 1996 for her services rendered as an officer of these
subsidiaries. In connection with her resignation, Ms. Thompson received a
release from certain non-competition covenants and a release of the stock pledge
described above.
F-21
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED)
OTHER TRANSACTIONS
See Notes 3, 8 and 9 for descriptions of other transactions and agreements
with Koll, Libra, Abex and WTI.
NOTE 11--RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all employees of the Company prior to September 30, 1993 who had
completed one year of continuous employment. The benefit accrual for all
participants was terminated on December 31, 1993. In November 1996, the assets
held in trust under the Company's supplemental and executive retirement plan
were paid to participants in exchange for each participant's release of any
future benefit claims under this plan, resulting in termination of the executive
plan and the curtailment gain recorded in 1996. Net periodic pension cost for
the years ended December 31 consisted of the following (in millions):
1994 1995 1996
------ ------ ------
Service cost................................................ $ -- $ -- $ --
Interest cost............................................... .5 .5 .5
Actual return on assets..................................... .1 (1.4) (.8)
Net amortization and deferral............................... (.5) 1.0 .4
Gain on curtailment......................................... -- -- (.3)
------ ------ ------
Net periodic pension cost (income).......................... $ .1 $ .1 $ (.2)
------ ------ ------
------ ------ ------
The funded status and accrued pension cost at December 31, 1995 and 1996 for
defined benefit plans were as follows (in millions):
1995 1996
--------- ---------
Actuarial present value of benefit obligations:
Vested...................................................................... $ (6.9) $ (5.3)
Nonvested................................................................... -- --
--------- ---------
Accumulated benefit obligation................................................ $ (6.9) $ (5.3)
--------- ---------
--------- ---------
Projected benefit obligation.................................................. $ (6.9) $ (5.3)
Plan assets at fair value..................................................... 5.9 5.0
--------- ---------
Projected benefit obligation in excess of plan assets......................... (1.0) (.3)
Unrecognized net loss......................................................... 1.0 .7
Adjustment required to recognize additional minimum liability................. (1.0) (.7)
--------- ---------
Accrued pension cost.......................................................... $ (1.0) $ (.3)
--------- ---------
--------- ---------
The development of the projected benefit obligation for the plans at
December 31, 1994, 1995, and 1996 is based on the following assumptions: a
discount rate of 7%, and an expected long-term rate of return on assets of 9%.
Assets of the plans are invested primarily in stocks, bonds, short-term
securities and cash equivalents.
F-22
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CAPITAL STOCK
COMMON STOCK
Under its restated certificate of incorporation, the Company has authority
to issue up to 750 million shares of common stock, par value $.05 per share,
subject to approval of the Board of Directors (the "Board"), of which 625
million shares of Class A Common Stock and 25 million shares of Class B Common
Stock are initially authorized for issuance and an additional 100 million shares
may be issued in one or more series, and have such voting powers or other rights
and limitations as the Board may authorize. During 1994, 1995 and 1996, 1.2
million, an additional 1.0 million, and an additional 1.4 million shares,
respectively, of Series A Preferred Stock were converted into an equal number of
shares of Class A Common Stock.
In December 1993 the Company issued 3.4 million shares of its Class A Common
Stock in exchange for all of Libra's approximately $10.6 million in aggregate
principal amount of Subordinated Debentures plus accrued interest. In connection
with the Company's sale of Lake Superior Land Company to Libra, the net cash
proceeds from the sale of 3.4 million shares of Class A Common Stock held by
Libra will be forwarded to the Company. The estimated amount of proceeds to be
received from such sale is reflected in the equity section of the balance sheet
as deferred proceeds from stock issuance.
In November 1994 the Company issued 2 million shares of its Class A Common
Stock and warrants for the purchase of an additional 2 million shares in
connection with the acquisition of the Kathryn G. Thompson Company. The warrants
have an exercise price of $.25, are exercisable over a ten year period, vest in
equal installments over five years and are subject to certain cancellation
rights of the Company.
Under the Company's Indentures for the Debentures (Note 6), the Company is
prohibited from purchasing shares of its common stock.
PREFERRED STOCK
Under its restated certificate of incorporation, the Company has authority
to issue 150 million shares of preferred stock, par value $.01 per share, in one
or more series, with such voting powers and other rights as authorized by the
Board. Effective July 16, 1992, in connection with the Merger, the Board
authorized approximately 42.5 million shares of Series A Preferred Stock, which
have a liquidation preference of $.75 per share, participate in any dividend or
distribution paid on the Class A Common Stock on a share for share basis, and
have no voting rights, except as required by law (Notes 1 and 2).
The Series A Preferred Stock is redeemable at the Company's option, on 30
days' notice given at any time after the second anniversary of issuance, at the
liquidation preference of $.75 per share, in cash or generally in shares of
Class A Common Stock. Each share of the Series A Preferred Stock is convertible
at the holder's option, at any time after the second anniversary of issuance,
generally into one share of Class A Common Stock. Since the Series A Preferred
Stock became convertible in July 1994, approximately 3.6 million shares have
been converted into an equal number of shares of Class A Common Stock.
NOTE 13--STOCK PLANS
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan ("1993 Plan") was approved at the
1994 Annual Meeting of Stockholders as the successor equity incentive program to
the Company's 1988 Stock Plan. Outstanding options under the 1988 Stock Plan
were incorporated into the 1993 Plan upon its approval. Under the 1993
F-23
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK PLANS (CONTINUED)
Plan, 7.5 million shares each (including 3 million shares each originally
authorized under the 1988 Stock Plan) of Series A Preferred Stock and Class A
Common Stock were reserved for issuance to officers, key employees and
consultants of the Company and its subsidiaries and the non-employee members of
the Board. Options generally become exercisable for 40% of the option shares
upon completion of one year of service and become exercisable for the balance in
two equal annual installments thereafter.
The 1993 Plan includes an automatic option grant program, pursuant to which
each individual serving as a non-employee Board member on the November 29, 1993
effective date of the 1993 Plan received an option grant for 125,000 shares each
of Series A Preferred Stock and Class A Common Stock with an exercise price of
$.4063 per share, equal to the fair market value of the underlying securities on
the grant date. Each individual who first joins the Board as a non-employee
director after such effective date will receive a similar option grant. Of the
shares subject to each option, 40% will vest upon completion of one year of
Board service measured from the grant date, and the balance will vest in two
equal annual installments thereafter. Each automatic grant will have a maximum
term of 10 years, subject to earlier termination upon the optionee's cessation
of Board service.
Each non-employee Board member may also elect to apply all or any portion of
his or her annual retainer fee to the acquisition of shares of Series A
Preferred Stock or Class A Common Stock which vest incrementally over the
individual's period of Board service during the year for which the election is
in effect. During the year ended December 31, 1994, 126,856 shares were issued
under this provision. No shares were issued under this provision during 1995 or
1996.
F-24
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK PLANS (CONTINUED)
A summary of the status of the Company's stock option plans for the three
years ended December 31, 1996, follows:
NUMBER OF SHARES PRICE PER SHARE
---------------------- ------------------------
CLASS A SERIES A CLASS A SERIES A
COMMON PREFERRED COMMON PREFERRED
OPTIONS OUTSTANDING STOCK STOCK STOCK STOCK
- ------------------------------------------ ---------- ---------- ----------- -----------
December 31, 1993......................... 6,350,000 6,350,000 .23 - .41 .14 - .41
Granted................................. -- -- -- --
Exercised............................... -- -- -- --
Cancelled............................... -- -- -- --
---------- ---------- ----------- -----------
December 31, 1994......................... 6,350,000 6,350,000 .23 - .41 .14 - .41
Granted................................. -- -- -- --
Exercised............................... -- -- -- --
Cancelled............................... (75,000) (75,000) .41 .41
---------- ---------- ----------- -----------
December 31, 1995......................... 6,275,000 6,275,000 $ .23 - .41 $ .14 - .41
Granted................................. -- -- -- --
Exercised............................... -- -- -- --
Cancelled............................... -- -- -- --
---------- ---------- ----------- -----------
December 31, 1996......................... 6,275,000 6,275,000 $ .23 - 41 $ .14 - 41
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Options exercisable at December 31,
1996.................................... 6,275,000 6,275,000 $ .23 - 41 $ .14 - 41
Options available at December 31, 1996.... 1,098,144 1,225,000
In connection with the Exchange Offer, the outstanding options set forth
above will be cancelled and new options comprising 6% of the Company's fully
diluted equity will be granted based on the average trading price for 20-days
following completion of the Exchange Offer.
F-25
KOLL REAL ESTATE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for 1995 and
1996 (in millions, except per share amounts):
FIRST SECOND THIRD FOURTH FULL YEAR
--------- ----------- --------- --------- -----------
1996
Revenues (a)................................. $ 2.7 $ 16.0 $ 6.4 $ 19.7 $ 44.8
Cost of sales (a)............................ 2.5 14.3 5.2 18.2 40.2
Loss from continuing operations.............. (7.9) (6.7) (7.6) (6.7) (28.9)
Net loss..................................... (7.9) (6.7) (7.6) (6.7) (28.9)
Loss per common share........................ (.17) (.14) (.16) (.14) (.60)
Weighted average common shares
outstanding (b)............................ 47.7 48.0 48.5 48.9 48.3
1995
Revenues (c)................................. $ 6.4 $ 5.7 $ 6.8 $ 15.1 $ 34.0
Cost of sales (c)............................ 7.3 5.2 5.9 13.5 31.9
Loss from continuing operations (d).......... (5.7) (2.6) (8.5) (100.1) (116.9)
Net loss (d)................................. (5.7) (2.6) (8.5) (100.1) (116.9)
Loss per common share........................ (.12) (.06) (.18) (2.11) (2.48)
Weighted average common shares
outstanding (b)............................ 46.6 47.0 47.3 47.5 47.1
- ------------------------
(a) The Company recorded revenues and cost of sales of approximately $10.1
million from residential lot sales at Rancho San Pasqual primarily during
the second and fourth quarters. In addition, the second quarter includes the
sale of the Eagle Crest golf course at Rancho San Pasqual, and the fourth
quarter includes the sale of Fairbanks Highlands as a result of the
formation of a joint venture in which the Company has a continuing interest.
(b) The Series A Preferred Stock is not included in the calculation of weighted
average shares outstanding because the effect is antidilutive.
(c) The Company recorded revenues and cost of sales of approximately $8.0
million and $8.1 million, respectively, in the fourth quarter of 1995 from
the sale of residential land and the marina at its Wentworth By The Sea
project in New Hampshire.
(d) The Company recorded asset revaluations of $7.5 million and $116.6 million,
which were partially offset by income tax benefits of $2.6 million and $24.0
million, respectively, in the third and fourth quarters of 1995.
F-26